Empire of the Fund – A SavvyReview and Giveaway

Empire of the Fund: The Way We Save Now

Hardcover: 218 pages

Publisher: Oxford University Press (2016)

The About the Author at Amazon notes that William Birdthistle is a Professor of Law at Chicago-Kent College of Law, where he specializes in investment funds and corporate law. Previously, he served as a law clerk to the Honorable Diarmuid F. O’Scannlain of the U.S. Court of Appeals for the Ninth Circuit and practiced law at Ropes & Gray LLP. Birdthistle was born in Cork, Ireland and raised in Libya and Malaysia. He came the United States to attend Duke University and Harvard Law School, where he served as managing editor of the Harvard Law Review.

William A. BirdthistleThe book’s Introduction does a nice job of setting the tone for what follows, which is an investigation of the way Americans now save and make financial preparations for retirement. Birdthistle notes that over the last 30 years or so, there has been a fundamental change in that process. Pensions – defined benefit plans – are largely a thing of the past and Social Security benefits are inadequate. Into this breach stepped personal investment accounts, generally characterized by 401(k) defined contribution plans, and their key tool, mutual funds.

Even though the manner in which most Americans are exposed to the financial markets is via mutual funds, Birdthistle suggests most are unaware of the complexities and perils.

Anatomy of a Fund

Part I of the book, the first three chapters, discusses the structure, purpose and economics of mutual funds. In the event readers are not sure what a mutual fund is, Birdthistle notes that it is a financial tool that gathers money from different investors and that combined pool of money is used to buy a portfolio of stock, bond, and other financial investments. And of course, the purpose is to achieve positive returns.

With respect to structure, Birdthistle makes an important point investors would be wise to understand: “A mutual fund … is an equity arrangement. That is, fund investors are shareholders, not creditors nor account holders; they hold stock, not debt. The consequences of this legal status are important, primarily because they permit substantial – even total – loss in the investment.” The final chapter in the first part looks at the economics of mutual funds. Though Birdthistle goes into great detail over the chapter’s 18 pages, the information he hopes to convey is pretty straight forward: investors have to be aware of how advisers are paid because how someone is compensated often impacts how they will behave with respect to fund management.

Diseases and Disorders

The first chapter, Diseases and Disorders, in Part II continues the discussion of fees, specifically the magnitude of fees, the impact of competition in the mutual fund industry on fees, and a detailed discussion of 12b-1 fees, the costs associated with annual marketing or distribution on a mutual fund.

The chapter on fees is followed by chapters on soft dollars, fair valuation, late trading, market timing, and selective disclosure. Although brief, at six pages, the Selective Disclosure chapter was among the most interesting to me. As the name suggests, information that is material to a fund’s performance is not necessarily shared – or shared in a timely manner – with the public at large. It is selectively shared, often with preferred clients, such as hedge funds, but not regular investors. In essence it is a form of insider trading; a disorder indeed!

Empire of the Fund

Alternate Remedies

The third part of the book is likely the most relevant and interesting to readers of this blog. Like each of the other chapters, the first chapter – 401(k) and Individual Retirement Accounts – in Part III starts with a quote:

“The 401(k) is a way for both your government and your employer to disown you, and to leave your life savings to be raided by the financial-services industry and its plethora of hidden and individual fees.”

~ Felix Salmon, “The Systemic Plight of Labor,” 2013

The takeaway from that quote will probably differ for each reader. My takeaway (and the reason I run this blog), and I believe the reason Birdthistle wrote, and included it in this book, is because the financial services industry, our (American) approach to retirement planning, and the primary tool for most Americans – the 401(k) plan – are each flawed; and therefore, the only way most can hope to find financial success, is to be aware of those flaws and construct a plan that will work within that existing framework.

Over the four chapters in this part – one for each topic – Birdthistle does a nice job of providing detailed information (e.g. tax treatments, risk tolerance, fees, flexibility, etc.), on the aforementioned 401(k) and individual retirement accounts, target-date funds, exchange-treaded funds, and money market funds.

Cures

This final part is comprised of a single chapter, A Healthier Use of Mutual Funds, which provides the author’s prescription for how we treat the ailment, how we save. Before delving into the prescriptions, Birdthistle smartly notes the impediments, the financial literacy of the citizenry and the structural imbalances in the system.

To address financial literacy, Birdthistle suggests we turn to utilizing a licensing system, somewhat akin to the requirement that new drivers must be tested and licensed prior to operating a motor vehicle. For certain investments, Birdthistle proposes a modest licensing regime. To obtain the license, individual investors would be required to take lessons and pass a test. That is certainly an approach that is different from anything else I have heard.

Birdthistle suggests two actions to address the structural imbalances: increase the bargaining power of individuals by pooling their economic strength and perform greater enforcement. With respect to pooling economic strength, Birdthistle proposes we allow individuals to invest in the Thrift Savings Plan (TSP), the federal government equivalent to the 401(k) and a program I have championed on the pages of this blog (here [see comments section] and here) in the past. While I won’t go into the detailed structure of the TSP, Birdthistle accurately notes its success can be tied to its modesty, prudence, and low (.029%) fees.

With respect to greater enforcement, the prescription is very straight forward and obvious. Some regulations governing mutual funds should be revised and a greater effort should be made to enforce those revised and existing regulations.

Final Thoughts

Those that are serious about retirement planning will find a lot to like about this book; I know I did. Birdthistle does a nice job of describing the purpose, structure and economics of mutual funds, the most prevalent investment vehicle for most Americans; identifying the various types of funds; identifying the diseases and disorders that afflict the mutual fund industry; and suggesting viable cures.

The book is available at Amazon in Kindle and Hardcover version, $14.39 and $33.15 respectively.

The Giveaway – simply leave a comment to be entered – will end, and the winner selected, at 12:00 p.m. (EDT) on Sunday, August 7th.

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

9 Comments

  1. While I like the “concept” of teaching users about the system, I am afraid that what would emerge is a bloated bureaucracy run by either the government or the financial services industry vultures themselves doling out only what they want us to know. The idea of the employers requiring it also is like letting the fox have the key to the henhouse. They would probably figure a way to teach people to invest in their own stock. Maybe a role is there for the CFPB and Sen. Warren?

    • However it’s done, we need a better system in place for educating consumers with respect to financial services and products. I’m a big fan of the Consumer Finance Protection Bureau (CFPB) and could definitely see them playing a role.

      Thanks for stopping by and sharing your thoughts, my friend. Make sure you stop by later today when the giveaway winner is announced.

  2. The section on “utilizing a licensing system” as a means to address financial literacy is incredibly interesting. We actually had a “module” we were required to take to explain 403b’s in our workplace the last 5 years or so. I know most people just click through it though. I had my 403b money in high fee mutual funds for years and never had any idea. I signed up as a new teacher and in the midst of all the paperwork of a new hire, I just signed up because I knew I should. From then on, it was just on “auto-pilot”… I can’t even begin to consider the fees I paid. But, we move forward! Nice review James!

    • Thanks for stopping by and sharing a little of your own experience, my friend. I can’t stress enough how detrimental fees are to reaching financial freedom. I often tell people if they understand nothing else, understand two things: the power of time and compound interest (exponential growth) and the impact of fees (and the need to keep them low as possible).

      Thanks again for stopping by and be sure to check in on Sunday when the winner is announced.

    • Congratulations, Vicki on being selected as the giveaway winner!

  3. I love a good non-fiction book that helps people. This books looks like an excellent read and I would love to win it.

    • Good luck, my friend. Check back on Sunday when the winner will be announced.

  4. A very sobering look at an industry we all need to know more about.

    • Indeed. And this book provides a lot of useful information to help investors avoid some common pitfalls. Thanks for stopping by, my friend and check back on Sunday when the winner will be announced.

Leave a Reply

Your email address will not be published. Required fields are marked *