Objective advice, or shady recommendations

Another great article in the Wall Street Journal: this one about how investors are confused about adviser fees and regulation.

The issues may seem nit-picky, but they have a big impact on investor outcomes.

On the one hand, you have fee-only advisers who are paid as a percentage of assets under management, a flat fee, a per hour fee, or a per task fee.  

On the other hand, you have fee-based advisers, who are paid by a combination of fees and sales commissions.  

If the issue seems trivial, let me explain.  A fee-only adviser will not get $5,000 for advising that you invest $100,000 in a particular mutual fund.  A fee-based adviser will.

When you ask a fee-only adviser for advice, you know they aren’t steering you toward a lucrative product which may not be right for you or any good.  With a fee-based adviser, you don’t know.  

Asking a fee-based adviser for advice is like asking a barber if you need a haircut–the answer will always be yes.

Another issue is fiduciary duty.  An investment adviser (a regulatory designation: Investment Adviser’s Act of 1940) must put the interest of clients’ above their own.  A broker/dealer (Securities Exchange Act of 1934) has no such obligation.

When you see fee-based, think broker/dealer and barber.  When you see fee-only, think advice in your best interests.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Objective advice, or shady recommendations

Investors are their own worst enemy

Jason Zweig had a excellent article in the Wall Street Journal about how investors get worse returns by chasing hot performance right before it disappears.

Essentially, investors get much worse returns than the funds they invest in.  The reason: they sell what hasn’t been doing well and buy what has been doing well.  If they held the same fund over time, they’d get the same returns as the fund, but they buy and sell at the wrong time and get worse returns.

It’s not just individual investors who are prone to this–professionals investors do it, too.  The problem is that investors are paying professionals to do the same thing they would do, but then they end up even farther behind because they’ve also paid a professional fee.

Investing is simple, but not easy.  To get good returns, you need to choose the right principles, and then follow them through thick and thin.  That’s hard to do for most investors, especially because they pick professionals they like instead of the ones who are competent.

So was it ever.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Investors are their own worst enemy

How NOT to pick a mutual fund

The Wall Street Journal had an excellent article recently about how NOT to pick a mutual fund:

1. Focusing too much on past returns.  Separating luck from skill is extremely difficult, so you don’t know whether the fund with excellent past returns is going to do well going forward or blow up.

2. Not understanding how the money is invested.  The process of investing generates results, so you need to focus on the cause, not the effect.  If you don’t understand the process, there’s no proof it works, or it’s too narrowly focused on what has worked well recently, stay away.

3. Diversification in name only.  Diversification is only worthwhile is if it’s truly diversified and if it’s very low cost.  If diversified means 5 different mutual funds focused on gold, you’re toast.  If it means you buy 5 full cost (1% annual fees) mutual funds that cover large, small, value, growth, bonds, etc., then you’re throwing your money away.

4. Chasing headlines.  If you buy something because it’s in the headlines of the news, then you’ll almost certainly get crushed over time. The smart money has already bought and sold before it’s in the headlines.

5. Buying on ratings alone.  If you focus on the ratings/stars that most mutual funds advertise (there’s a reason why they are advertising that fund now, and not at other times), then you’ll likely get bad results.  Most returns aren’t persistent (they don’t continue in the future), so if you buy what has done well recently, you’ll probably lose money.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

How NOT to pick a mutual fund