What I Learned When I Got Rejected by a Giant Mutual Fund Company

Following a layoff from a tech startup (RIP), I thought I would return to my financial roots. After a few weeks to assess my position, I responded to a job opening in the marketing department of a global financial services provider.

The process was an excellent learning experience. Here’s what I discovered.

Actively-managed mutual funds are the next Blockbuster Video

Did everyone in America listen to countless personal finance blogs, forums, Frontline, and Jack Bogle? It certainly looks that way. In droves, investors are choosing cheap ETF’s and index funds over actively-managed funds where supposedly a bunch of people far smarter than you will help you outperform the market.

The value proposition of managed funds is a familiar pitch, repeated ad nauseum across the industry. Pictures of sailboats, golf courses, and happy grandkids adorn glossy brochures and websites heavy on words like “independence” and “security.” Dig into the individual funds, and you’ll find a combination of confusing language (terms like “leveraged short-term duration municipal bond arbitrage” are not meant to understood by everyday investors) and soothing prose designed to convince potential investors that its managers are indeed very, very smart sonsofbitches.

It’s a convincing spiel. Exhaustive research. Teams of diligent analysts on-location at the offices and factories of publicly-traded companies. Geeked-out quantitative math modeling. Boutique managers specializing in narrow niches. It all sounds very impressive. And hey, some of those funds do outperform the market sometimes.

The big problem? The actively-managed pitch is a lie. An utter lie.

From 2008–2013, only twenty seven percent of fund managers managed to match or outperform their benchmark indices. Was this dismal performance an aberration?

Not by a long shot; it’s just par for the course.

The fact is, you’d be better off simply buying a passive fund or index-tracking ETF that tracks the S&P 500. The track record is clear: actively-managed funds which typically charge fees of around two percent, don’t reliably outperform passive funds — typically with fees closer to .2 percent — that simply track the movement of the stock market.

Where do those extra fees go? To pay the six-and-seven-and-eight figure salaries of those supposed geniuses managing the funds. To pay for brochures and websites that bring more innocent investors into the fold.

This is no geeky financial minutiae. Giving up that extra 1.8 percent on a long-term investment can suck hundreds of thousands out of your wallet over the decades. It can spell the difference between a safe and secure retirement, and one fraught with uncertainty and worry.

While these facts don’t come as a massive revelation, I had figured that this particular organization— one that trafficks in actively-managed funds — must have some idea how to deal with the eight-year exodus away from their products. My conversations revealed otherwise.

During my (nearly-two-month) interview process I had the opportunity to speak with people who have been in the industry for decade upon cubicle-laden decade. They confirmed not just that the trend away from active funds is accelerating, but that the numbers are even worse when viewed from the inside.

What was truly surprising is the stubborn, stay-the-course attitude in the face of this trend. Their concern is more with placating the financial advisors who sell their products, than actually changing the way business is done.

Most of the people I talked to were intelligent and passionate about what they do. But trust me when I say that collectively, they are running scared. It’s not because these people don’t have ideas on how to deal with the problem — I think they do. It’s the fact that their corporate masters are dry-humping a disproven value proposition.

All the slick advertising and athlete endorsements in the world can’t make customers choose your way of doing things when the other way is just as good, but far, far cheaper.

The industry could change. It could reduce overhead and lower fees. Instead, it chooses to bury its head in the sand. Much like the music industry was decimated by file sharing and Blockbuster was obliterated by the video streaming of Netflix, active funds will go the way of the dodo thanks to their unwillingness to adapt.

Image courtesy bogleheads.org. Both funds assume an initial $10,000 investment and 8% annual growth over 30 years.

Will fund managers magically figure out how to outperform the market on a consistent basis? It’s hypothetically possible. But if the last 50 years are any indication, it’s not gonna happen.

This is an entire way of structuring money that’s in for utter disruption. Mutual funds will remain. Those that vacuum money from your nestegg and put it in the hands of commission-driven financial advisors, executives, fund managers, and sales staff — will not.

That brings us to lesson number two:

Sometimes your heart and soul win out over your brain.

And that’s not a bad thing. In the short-term —well, that sexy salary would have been very nice. But would I have been holding my nose and making justifications to myself while helping to sell a product I didn’t believe in? Most definitely. Would I have wound up disillusioned and unfulfilled, with my fortunes tied to an RMS Titanic of a business model? I think so.

It’s easy to justify things to yourself when you’ve got money rolling in. Yet true fulfillment in life is difficult to find when a big chunk of it is spent selling a product that will almost certainly harm its users in the long run.

So I’ll chalk this up as a dodged bullet — a detour on the route to something better. But for those who buy into the slick-yet-invalidated promises of actively-managed funds, the danger is clear, present, and lasting.

Caveat Emptor.

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