AllianceBernstein's Triumph of Marketing, Hype and Hope

(MoneyWatch)  AllianceBernstein is one of the world's leading investment firms -- at least in terms of assets under management. As of December 2009, the firm had total client assets at $496 billion. The Web site of its wealth management arm, Bernstein, proudly states the following:

"Our investment research footprint includes multiple perspectives of growth stocks, value stocks, municipal bonds, and taxable bonds. Further, we have dedicated investment research teams focused on innovations -- research that identifies and pursues issues before others have fully grasped their significance.

"At Bernstein, we believe that first-rate, completely independent investment research is the sine qua non of investment success for our clients."

As a recent Morningstar report clearly demonstrates, the historical record tells a completely different story. In the most recent decade, AllianceBernstein managed to destroy more investor wealth -- $11 billion -- than all but two mutual fund families. (Janus and Putnam managed the ignominious feat of outdoing AllianceBernstein.) So what went wrong?

The problem is that AllianceBernstein is playing the game on the wrong ball field. It thinks the competition is individual investors like you and me. If that was the case, all its research might give it a competitive advantage. However, as I discuss in my book Wise Investing Made Simple, the competition isn't other individual investors. And it's not even other institutional investors with just as many (if not more) resources as AllianceBernstein and with staffs that are just as smart and dedicated.

The competition is what is known as "the collective wisdom of the crowd." And that has proven to be an extremely difficult competitor indeed.

The evidence from academic studies clearly demonstrates that not only do the vast majority of professional investors underperform appropriate risk-adjusted benchmarks, but there's no persistence of performance among the few winners beyond the randomly expected. That means that past performance isn't prologue and is the reason for the required SEC disclaimer.

AllianceBernstein is not alone in this shill game. If you go to the Web sites of the other great wealth destroyers, you will find similar pronouncements. For example, Janus proclaims: "Our research-driven investment approach sets us apart from the competition and has enabled us to deliver results for our investors." Well, that approach cost investors $58 billion over the last decade. And Putnam's Web site boasts how they earned the top spot in Barron's latest Best Fund Family Ranking. It only managed to destroy $46 billion of investor wealth.

The next time you're tempted to consider an active fund manager, consider this admission from one of the industry's legends, Ralph Wanger, the former lead manager of the Liberty Acorn Fund.

"For professional investors like myself, a sense of humor is essential. We are very aware that we are competing not only against the market averages but also against one another. It's an intense rivalry. We are each claiming, 'The stocks in my fund today will perform better than what you own in your fund.' That implies we think we can predict the future, which is the occupation of charlatans. If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you."

If you currently invest with one of the great wealth destroyers, you should ask yourself why you continue to engage in such destructive behavior. Remember, even smart people make mistakes, but only fools keep perpetuating them.