Another day another person getting bamboozled by their financial advisor. Today's victim is recently elected U.S. congressman Greg Gianforte. To be fair, I am not sure if he is a victim, or, if he is doing this damage to himself.
What damage? I'll show you. Take a look at this portfolio that The Guardian got their hands on. Zoom in if you need to then keep reading below. This will help you with your own portfolio of funds if you don't understand what you're invested in or wondering why you're invested in so many funds.
If you read the paragraph at the top you can see that The Guardian's concern is that Gianforte could have ties to U.S.- sanctioned Russian companies due to his Russia ETF investment.
I sort of agree with the analyst at Bloomberg Intelligence who says: "That's absurd. Russia ETFs account for 0.10% of his portfolio and are being used to achieve alpha, not influence with Putin."
I say "sort of agree with" because I'm not entirely sure how much alpha you're going to get with a 0.10% investment. That's not 10%. That's one-tenth of one percent. This is why I feel confident that the above portfolio was created by a high fee financial advisor. They notoriously love to insert all sorts of small investments, like you see above, in their clients' portfolios.
If the financial advisor told you that you could invest in a handful of low cost index funds and achieve the same investment return, they'd have nothing to do all day (enter rob-advisors). The other reason is for fees. Sometimes advisors are paid a kickback for recommending certain investment funds to their clients. This becomes sketchy when the advisor could recommend a fund that has equally good performance, but doesn't because the advisor wants to collect a higher fee.
Now, about the red comments from experts, let's break those down because this will help you with your fund investments:
Ben Johnson from Morningstar is on the money. Those two funds he highlights, RSP and IJH, are very similar except for one thing: one of them charges 0.07% per year to invest in and the other charges 0.40%. Remember the expense ratio (aka management fee) is based on the amount of money you have in that fund. So if you have $100 in the fund that charges .07% per year, you'd pay $100 * 0.07% in fees per year to that fund. If you have two funds that are nearly identical why are you invested in one that is charging 5x the fees? Don't tell me diversification because if the funds are highly correlated and I'm sure they are, you're not getting much diversification. Someone get this advisor to the SHU.
I'd sell RSP and put that money in IJH.
David Nadig says Gianforte is loaded up on "emerging markets so he is clearly counting on a big rally there." Hmmmm. When I add up the EM exposure in the above it totals 1.9%. Less than 2% of the portfolio is not "loaded up." I do find it a disgrace that Gianforte has less than 2% of his portfolio spread across 16 funds! He's loaded up on funds not exposure (big difference), which brings me to my next point.
Todd Rosenbluth from CFRA is trying to make a positive point about the portfolio, which I agree with, but I still think the portfolio is garbage. Rosenbluth is saying that if you invest in an emerging markets fund like this Vanguard fund, you'll get a lot of China exposure. That's true. That Vanguard fund I linked to has about 30% invested in China. So, if you want direct exposure to other emerging market countries aside from China, you could invest in individual emerging market country funds. That's also true. But, when I add up all those small EM funds, I get a total of about 1.4%. That's it.
Overall Gianforte has 1.9% of his portfolio split across 16 funds EM funds. If you look up over-diversification in the dictionary that is what you'll find. More is not better when: 1) the investment sizes are teeny tiny and just noise to your overall portfolio and 2) the funds are highly correlated.
A classic way to slip in some higher fee funds is to create a portfolio with an excessively large roster of investment funds. So many funds that the client kind of loses track and then feels that they need the advisor even more now to explain everything. Also, there is such a thing as over-diversification. That happens when the diversification benefit of adding funds/securities to your portfolio is no longer existent because you're now adding funds/securities that are just as correlated to assets you already own.
I find it highly unlikely that Gianforte created the above portfolio on his own. I'd bet my life that a financial advisor did this to him. Remember the fiduciary rule? Me neither.