This is the time of year when you will likely compile a list of goals for 2017. Here's one I hope you will put at the top of your list: Don't be a sucker for terrible, conflicted investment advice. Unlike many other New Year's resolutions, this one is very easy to implement. Here's a proposed game plan:
Avoid market-beating brokers
I can't think of a single, valid reason to use a broker and many compelling reasons why you should avoid them. The most striking one is they don't have to place your interest above their own. They can -- and often do -- sell you investment products that generate the highest fees for themselves and their firm, when less expensive options are available, with higher expected returns. They don't even have to disclose this conflict of interest. You can find more information about this low standard of care brokers are legally obligated to provide here.
They also give lousy advice. Over the long term, the average investor has realized returns of about 3.7 percent, which is below the actual returns of almost every asset class.
Brokers win. Investors lose. There has to be a better way. Fortunately, there is.
No advice may be an option
The securities industry has done a great job persuading you investing is too complicated for you to manage on your own. For many investors, this is simply not true. You may be able to satisfy all your investing needs by buying just one fund. Vanguard offers its LifeStrategy Funds, at different risk levels, ranging from very conservative to aggressive. These funds invest in Vanguard's broadest index funds, providing ample diversification of the U.S. and international stock markets. They have a very low average expense ratio of only 0.16 percent.
Vanguard's LifeStrategy Moderate Growth Fund (VGMGX) holds 60 percent stocks and 40 percent bonds. If this is a suitable asset allocation for you, compare the returns of this one fund to your portfolio. Since inception on September 30, 1994, it had average annual returns of 7.48 percent. The minimum investment is only $3000.
Sound, intelligent and responsible investing doesn't have to be complicated. Don't expect your broker to tell you about these funds.
Focus on fees
You're in luck if you need an advisor. There are many new options available to you that will provide sound investment advice, access to a credentialed advisor and provide you with a comprehensive financial plan. The cost of these services is a fraction of what traditional advisors currently charge (although I suspect their fees will start to come down). Here are two suggestions:
1. Vanguard Personal Advisor Services: Vanguard's new service builds a portfolio with its low-cost index funds, acts as an investing coach and minimizes your taxes. The cost of this service is only 0.30 percent of your assets under management annually, which is less than one-third of the industry average of 1.02 percent.
2. Schwab Intelligent Advisory: In a major development, Schwab announced it will launch a service similar to Vanguard's sometime in the first half of 2017. It will offer comprehensive financial planning, ongoing guidance from financial planning consultants, and fully automated, diversified, low cost portfolios. The cost is only 0.28 percent of assets managed, with a $900 quarterly fee maximum.
Other low-cost options include robo-advisors. You can find a useful list of some of the leading ones here. All of them provide sound, academically based investing advice, for a very low fee.
Higher net worth investors, and those with complex financial issues, will continue to benefit from the services of traditional advisors. Be sure the advisor you select is a Registered Investment Advisor (RIA). All RIA's are required to place your interest ahead of their own and to disclose all actual and potential conflicts of interest. Advisors authorized to place client assets in funds managed by Dimensional Fund Advisors are an especially good choice. These advisors rely on sound, academically based principles of investing. You can find a list of these advisors here.
If you want to change your investing experience, 2017 is your opportunity to do so. You have never had so many great alternatives to choose from.
The views of the author are his alone. He is not affiliated with any broker, fund manager or advisory firm.
Any data, information and content on this blog is for information purposes only and should not be construed as an offer of advisory services.
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