THE BLOG
01/27/2015 05:01 pm ET Updated Dec 06, 2017

A Powerful Force Is Killing Your Retirement

Investment "professionals" could be killing your chances of retiring with dignity, if at all.

This extract, from one of America's most respected financial journalists, William Bernstein, should be read and reread by every investor:

"There are two kinds of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor - the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know."

Bernstein made this observation in his excellent book, The Intelligent Asset Allocator.

What's at stake?

Keeping you in the dark is big business. According to the 2014 Investment Company Fact Book, $15 trillion was invested in mutual funds in 2013, excluding exchange-traded funds (ETFs), closed-end funds and unit investment trusts.

When you multiply this staggering sum by any reasonable estimate of management fees, the gross revenue of the mutual fund industry is measured in the tens of billions of dollars annually.

Stockbrokers, because of their typical compensation structure, are highly incentivized to keep you buying and selling actively managed funds. In 2009, the largest 25 independent broker-dealers reported $10.5 billion in gross revenue. I'm sure that number is considerably higher today.

Massive lobbying

The securities industry thwarts investor-friendly legislation through massive lobbying campaigns. According to the Center for Responsive Politics, total lobbying expenditures by the Securities Industry and Financial Market Association in 2014 were $5.8 million.

This money was well spent. To date, efforts to impose a fiduciary standard on brokers, which would simply require them to act solely in the best interest of their clients, have been unsuccessful. In stark contrast, every registered investment advisor (RIA) has a legally binding fiduciary obligation.

Control of the financial media

By some estimates, the financial services industry spends upward of $7.8 billion on advertising. That incredible sum buys a lot of allegiance from the financial media.

For this reason, you are unlikely to see serious investigative journalism into the abuses of the financial industry (and there are many) in the mainstream financial media. Investors suffer as a consequence.

The cost to investors

While the securities industry is pocketing billions of dollars from misleading you about the "value" it provides, the cost of following its advice is appalling. In a seminal study, The Cost of Active Investing, professor Kenneth French found that investing in actively managed funds, as compared to index funds, costs investors in the aggregate about $80 billion a year.

You have a choice. You can continue to be a victim of the securities industry, whose primary goal is to transfer your hard-earned money to its balance sheet. Or you can become an "evidence-based investor," and invest in a globally diversified portfolio of low-cost index funds, ETFs or passively managed funds, in an asset allocation suitable for you.

The decision you make will have a seismic impact on whether or not you reach your financial goals.

2014-04-01-Hiresfrontbookcover.jpgDan Solin is the director of investor advocacy for the BAM ALLIANCE and a wealth adviser with Buckingham. He is a New York Times best-selling author of the Smartest series of books. His latest book is The Smartest Sales Book You'll Ever Read.

The views of the author are his alone and may not represent the views of his affiliated firms. Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.