January 18, 2013
We recently had a client contact us who wanted to know what she was earning in our money market fund because she had heard that another advisor was claiming significantly higher earnings on what they had to offer. During my over 15 years in the financial advising and investment business I have encountered this kind of reaction from clients several times. My experience and gut told me that if we were truly comparing apples to apples in terms of financial vehicles, earning a return that the competing advisor was claiming was highly unlikely. However, we always give people the benefit of the doubt and I never claim to know everything!
I contacted several trusted resources including our broker dealer who had several employees who had recently worked for the competitor who was supposedly offering this higher interest rate. All of the sources confirmed that the competitor did not have such a money market fund that earns what they were claiming and that the product must be one with more risk and liquidity restrictions.
The bottom line is this: The financial markets are so open and transparent now due to technology that we all have the same things to invest in. Therefore, if an investment has a MUCH higher return than other similar types of investments only one of two things can be true: 1.) It is not the same kind of investment OR 2.) The investment with the higher return has greater risk than the investment with the lower return.
Here is an example I always recall to illustrate this point: When I started in the business in the late 1990's, true money market rates were in the 4 - 5% range due to the higher interest rates at that time. The other large dynamic going on at that time in the financial markets was the Internet company craze. At that time we were seeing just about any company with a ".com" on the end of its name making significant stock market returns. During these times many clients called and did not want any of their portfolio sitting in the lowly money market fund which was ONLY making 4 -5% per year when they could be invested in an Internet stock and make significantly more. Well, we all know how THAT turned out.
Yes, there are many things which change second- by- second in the financial markets. However, one tenet I believe is still constant and that is: Given the same two investments, Higher Return = Higher Risk.
The information set forth herein was obtained from sources which we believe reliable, but we do not guarantee its accuracy. In addition, past performance is no guarantee of future results and we do not provide legal or tax advice.
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