Do investment fund companies owe a duty of care to investors?
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Everyone wants financial firms to abide by honorable codes of ethics, but companies that create investment products have a different type of fiduciary obligation (yes, they legally have one): they owe it to shareholders of their fund, who have opted into a specific strategy. Meaning they uphold their duty by outlining their intentions for this strategy in a prospectus, and delivering on them.
Whereas independent advisors owe a wide-ranging duty of care to clients, who have opted into a comprehensive partnership.
Consider this: if you bought a triple-leveraged, long-dated Treasury Bond ETF back in December 2021, that position is seriously sucking wind. But Direxion, a company who offers such a product (see below), doesn't owe a fiduciary responsibility to your investment return.
It was you that bought the investment, and you that wanted leveraged exposure to amplify your outcome. Unfortunately for you, long-dated bonds stunk:
You realized a -82% return...and...I want to defend the fund company!
Their job is not to help you pick investments. Their job is to design a portfolio strategy, and deliver on it for people who opt in.
I don't actually track investments like this (nor encourage clients to use leveraged ETFs!), but from what I can glean, this return is reasonable for triple-levering this exposure over this time period, and no reason to think Direxion did not deliver for their investors.
Meaning that you can uphold a fiduciary responsibility, and still deliver a shit return.
And so, shielded with the ability to not be held accountable to investment outcomes, we must follow the incentives of fund companies to understand their business strategies.
They want to make money, and their fiduciary obligation enables this. They don't have to care about your performance. Whether it's an S&P 500 index fund, or a triple-leveraged treasury ETF, they just need the fund you buy to do what they said it was going to do.
And so I was frustrated to see how BlackRock CEO Larry Fink, after having launched a Bitcoin ETF, described the performance of Bitcoin:
"It is an asset class that protects you."
Woah. Is he a advising on portfolio construction (like an advisor would), or does he sell funds for a living?
Larry has a fiduciary responsibility ONLY to deliver the return of Bitcoin inside his BlackRock Bitcoin ETF, not to whether that return is good or bad.
Advice is not his job. Thankfully, BlackRock COO Rob Goldstein properly described BlackRock's role in a recent WSJ interview:
“We view a core part of our mission as providing choice and access."
And that is what investors need to know: fund companies create tools (funds) to give investors choice and access to investment strategies. They should not be describing risky assets as something that will "protect you" in the future, when the future is completely unknown.
The last time investors needed "protection" — during the hell of 2022, Bitcoin was down 65%!
I'm not trying to takedown Larry or BlackRock here. Nor am I bashing Bitcoin. I simply want to delineate fiduciary responsibilities —
It is my job to help clients consider whether Bitcoin belongs in their portfolio, and it is Larry's job to create funds for investors who want to access it. He should not be claiming investment opinions as facts.
What Larry should have said, instead of "Bitcoin is an asset class that protects you," as a company that wants to sell its Bitcoin ETF, is simply:
"Bitcoin MIGHT BE an asset class that protects you."
And that's it. That's how you market and sell risky investments as a fund company, and stay in your lane. And he is VERY incentivized to sell this puppy: with over $15B in assets, and a stated expense ratio of .25% per year, the Blackrock Bitcoin ETF is closing in on expecting $40M in revenue per year from the ETF. And there is nothing wrong with making profits, or Bitcoin, or Bitcoin ETFs.
But there is a huge problem with investment companies letting unsupported investment guidance creep into their marketing to sell more funds.
Now we have investors who watched the CEO of BlackRock on CNBC tell them that Bitcoin will protect them, when it reality it may or may not. Larry — who I have nothing against and I'm sure is a lovely chap — simply doesn't have a legal, fiduciary responsibility to your investment outcomes, so that wasn't his job.
And his own salary is $25M+ per year, so I'd encourage him to just keep doing that job.
End.
