Revealing and extensive data can be found at this report by Cerulli: European Fund Selector 2014, Decoding the buying process. It clearly shows the differences in fund selection criteria that exist between true fund selectors, who are looking for good long-term returns, and mere fund salesmen/distributors, who are only looking for material to place in exchange for juicy commissions.
FundsPeople extracts some interesting graphs such as the one below, in which we see a clear distinction in the difficulty encountered by the funds in being validated by different agents in the investment world. Investors' rigour and stringency was rated between 1 and 5, with 5 being the most demanding level to pass investor due diligence. Among the most demanding group when it comes to approving the investment of their money in a given fund are pension funds, investment accounts of insurance companies, consultants/advisors, investments linked to insurance (e.g. unit linked) and family offices.
On the other hand, among the least demanding agents in their due diligence on the funds they recommend to their clients, we find multi-managers, banks with central selection offices (private banking), regional offices (commercial or personal banking), independent financial advisors (ex-bankers) and finally online fund selection advice platforms. In the graph we can also see the distinction between the difficulty for funds to pass due diligence and be included in their lists of investable funds, and the difficulty to remain on these lists of suitable/recommendable funds over time. Let us make some reflections on this.
First of all, it is clear that the priority for the most demanding is to preserve their own or their clients' money in the long term. Insurance companies, consultants, family offices and institutions seeking to secure future pensions are logically concerned about the future performance of their money. A long-term vision that coincides with that of any self-respecting investor.
On the other hand, as for those who demand less to approve any fund, it is scandalously evident that their priority is not the interest and the good of their clients' investments, but the short-termism of what they obtain from their sales. Moreover, these banks, online platforms and independent advisors (mostly ex-bankers, and therefore with the same criteria and vices) are not concerned with maintaining the level of stringency in their lists of approved funds, but on the contrary. Once a fund is approved, it will easily remain on their list of recommended funds, whatever happens to those funds over time - as long as they continue to pay them the agreed fees, of course. On the other hand, the most demanding agents are constantly checking that the approved funds continue to meet the criteria that validate them. And this means that the less brilliant funds, or those that cease to be so, find it very difficult to remain on the list of privileged funds that receive the money of these demanding investors. As it should be.
In short, a clear x-ray of the quality of selection shown by both sides in the investment world. In other words, it shows who is who, i.e. who is looking after the money invested, and who is looking exclusively after always having a catalogue of funds that are well marketable and generate good commissions in the short term. Groucho Marx's famous line: «These are my principles. And if you don't like them, I have others». So it is in the same way that the brokers at the bottom of the chart come to tell their long-suffering Clients: «This is our selection of «the best» funds. And if you don't like them, we have many others to sell you».».
It is also shameful to see how many «professional» media in the sector are much more concerned with the rankings of the best-selling funds, instead of worrying about the ranking of the funds with the best yields. Another surprising detail is that banks and other advisors from the banking world can unashamedly recommend any newly created fund. Without having checked or tested any track record or the soundness of the management. Simply because these funds will sell well with their corresponding marketing campaign, and these sales will translate into juicy short-term profits for the distributor. An unfortunate question of priorities.
I recommend that you also take a look at the trilogy of articles in which for many years we have been denouncing the mediocrity criteria perpetrated by most of these short-sighted bankers and ex-bankers: Criteria of Mediocrity Part 1, Criteria of Mediocrity Part 2, Criteria of Mediocrity Part 3. Needless to say, this criterion of mediocrity dissipates the higher up in the above graph we are. In a way, we could say that those at the top are more like buyers of investments (for themselves or for their Clients), who are concerned with the good performance of those investments; while those at the bottom are mere sellers of investments, who are only concerned with the volume of their sales. Real as life itself.