Smart Advice for the HuffPost Investor: Ten Simple Steps to Level the Playing Field for Investors

These are clearly tumultuous and troublesome times for investors. The volatility of the markets would be bad enough standing alone. It is compounded by the mendacity of some brokers and advisors who profit from giving investors poor -- and even misleading -- advice.

Poor advice is the norm of brokers and advisors who claim they can "beat the markets."

Misleading advice is all too common. The recent announcement of a suit filed by the Secretary of the Commonwealth of Massachusetts alleging that UBS affirmatively deceived its retail clients into buying auction rate securities, when it knew the market for them was tanking, is the latest in a series of Wall Street scandals.

Here are ten simple steps that would go a long way towards protecting investors. If the SEC and Congress really cared about its constituents, it would enact them. All it would take is the political will to place the interests of its real constituents above those of the insurance and securities lobbies:

1. Ban all actively managed funds in 401(k), 403(b) and 457(b) plans.

2. Ban all annuities in 401(k), 403(b) and 457(b) plans.

3. Require all 401(k), 403(b) and 457(b) plans to have Target Retirement Funds (where the underlying funds were primarily index funds), and low cost index funds covering the domestic stock market, the international stock market and the domestic and foreign bond markets.

4. Require all 401(k), 403(b) and 457(b) plans to fill out a simple form, approved by the Department of Labor, that sets forth all costs incurred by the plan. Require the plans to post this form on the internet for easy access by all plan participants.

5. Outlaw "revenue-sharing" in all 401(k), 403(b) and 457(b) plans.

6. Require all brokers and advisors to give investors a standard risk assessment questionnaire and to advise them in writing if the risk of their investments deviates from the risk profile indicated in this questionnaire.

7. Require all statements from brokerage firms and advisors to disclose the costs and risk of their clients' portfolios, as follows:

The "cost equity" of your portfolio year-to-date is --%. This means that, before you can make a profit, your portfolio will have to earn at least that return.

The risk of your portfolio, as measured by standard deviation, is --%. Based on your risk profile, your standard deviation should range from --% to --%

8. Require all statements from brokerage firms and advisors to state the following:

The overwhelming data indicates that, over the long-term, index funds are very likely to outperform actively managed funds of comparable risk. There is similar data indicating that neither we, nor anyone else, can pick stocks, time the markets or pick mutual fund managers who can "beat the markets" over the long term with any persistence.

9. Abolish the mandatory arbitration system imposed on all investors who do business with a member of FINRA and permit them to seek redress for broker misconduct in the Courts, with a jury of their peers.

10. Require a ticker to run continuously underneath the musings of talking heads on television who give stock picking advice which says: "There is no data indicating anyone can accurately pick which stocks that will outperform other stocks over the long term."

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

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Comments

[DRaymond]

Commenting on item number 10.

It should alternate with another ticker that says 'Investing in a limited number of individual stocks is a high risk activity'

Continuing with your disclaimer, there is more than 'no data' supporting anybody being able to pick stocks that will outperform the other stocks in the long term. The efficient market theory presents a mathematical principle against their being able to do so.

The way I like to explain it to folks is thus: Let's presume for a moment that your super-genius stock picker has actually nailed it. He has really discovered a stock that ought to be trading at 30 dollars but is actually trading at 20. He is absolutely right. So what? The impressions of all the ordinary-genius stock traders that the stock is worth 20 will still be what determines the market price, which will stubbornly stay at 20 despite your super-genius' completely correct judgment that it ought to be 30.

Or to give a more specific example...Jim Cramer might have been absolutely right when he shouted on TV that there was nothing wrong with Bear Stearns. But the rest of the country had decided that it was going to h*** in a hand basket. Guess who won out?

[AmericaninFrance]

I understand your views regarding the advantage of investing in index funds for the long term rather than actively managed mutual funds. Do you see ETF's as advantageous as index funds? As an American abroad I am looking for investment options available to me given the limitations imposed by the Patriot Act. Thank you for your words of wisdom Dan.

[mamacat]

By refusing to privatise Social Security accounts, Congress did a great favor to Americans, but prevented many stock brokers from getting rich quick.

[cylindar]

Good Points. Another thing: tell would be investors that at this time it is not an investors market and they need to keep their money on the sidelines. You have to be pretty sharp to paddle through this disaster and the average investor(outsider) does not have nor will they be able navigate these waters safely. I do believe a real disaster is on the horizon. The markets are so volatile you would have a better chance of winning at the crap table in a Las Vegas casino at this point in time. A smart investor knows when to fold and say no thank you to the many investment counselors out there who are drowning and trying to drum up money to keep themselves afloat. Of course this happens at the would be investors cost. Ecclesiastes should have included "there is a time to invest and a time not to invest".

[Indubio]

Solin should well know that the nation's political leadership views the national interest and US corporate interests as one and the same...so, what's good for US companies is by definition good for us. This is why Congress does what it does. Forget any of what Solin suggests (not that what he says is bad). What Congress needs to do first is totally divorce the corporate from public interests because the two are not the same. Once this occurs, we can perhaps begin developing national policies that represent the nation's interests. Number one on my to do list would be to turn the entire energy industry into a public utility and re regulate it to the maximum. I can't imagine government or 20 reasonably informed members of the general public screwing up energy policy any worse than it is presently screwed up...

[January]

"...divorce the corporate from public interests..."? It would be called "socialism."

A critical issue will be public health care. It has worked wherever it has been tried. If and when it is tried in the US, then we shall see people less afraid of the label "socialist." Medicare for everyone needs to provide a close-to-home example that it is not necessary for us to compete on matters that are in our common self-interest.

Nationalized energy, however, will be a tougher battle because its remediation will be more diversified and therefore more vulnerable to the lies of vested interests.

[SisterAnn]

One thing I have noticed is if the market is up over a day, most of the financial show hosts start talking it down and if it has been down over a day they start talking like the market will go up. It is almost as though they don't want it to stay still. When you are worried about the market, hearing them say the market will probably go down influences you to sell.

Retirement money is too important to risk, so I agree with Dan, it should be in safe index funds and all the rest. The thing is, too many think they will get rich choosing their own funds, so they won't like 401ks being too regulated.

Most of us would be better off if the market was more stable and would slowly go up, instead of such big ups and downs. The money market in the 401ks and IRAs should be insured. The brokerages say they won't let us lose money, BUT.....

[robinhood2]

I finished reading Dan's 401K book at the bookstore today. If you are a teacher and you have a 403b plan invested in variable annuities, you really need to read the book's chapters on annuities. I agree with the author. They are a lousy investment in 401K plans, 403b plans and 457 plans. Most of them are also inappropriate outside a tax deferred vehicle as well. The Calif. State Teachers Retirement System has a good web site on 403b plans. Although the specific investment information is geered to choices approved by individual school districts in the state, the compare feature is the only one of its kind that I have seen on the Internet.

[joebaggadonuts]

11. Force 401Ks to provide for FDIC insured CD choices in the mix of choices available to hold money.

[robinhood2]

Don't hold your breath, Don. You might as well call for the closing down of all "full service" retail brokerage firms and financial planners and ban insurance agents from selling investment products. It has always been buyer beware in the world of high finance. At least we've had negotiated (discount) stock and option commissions since 1975 and there are a few no load mutual funds with low annual expenses around.

[bmora]

Amen!

[bertisbert]

DAN,
Thanks for putting out some crucial information on this site. Most people need a significant amount of education on how the financial markets work, and your advice is wonderful, but I would recommend that instead of framing it in terms of more regulation, use more of an educational approach.
The talking heads on CNBC and the like are insiders that also act as gatekeepers. Very rarely do they offer any sort of advice that would benefit the average investor. Of course, that may not be their target viewership, but if "average" people of average means didn't tune in, they would have been out of business years ago.
In the world of high finance, there are winners and there are losers. It is a zero-sum game, at the end of the day, and for every high-risk winner, there is an equally unfortunate loser on the other side of that transaction. That fact does not bother me in the least, but keep in mind that the consistent winners (insiders) are not necessarily interested in teaching everybody how to become winners, thus decreasing their chances of being on the winning side of these bets. So, beware the cheerleaders who will *always* continue to push investors into risky bets well past logical ceilings while they themselves are dumping their shares and laughing hysterically behind the scenes!
Again, appreciate your efforts!