Saturday, October 24, 2015

401(k) and IRA Investors Need Solid Long Term Oriented Investment Advice ... Not Commissioned Brokers or Robo Advisors

Too many individuals don't save and invest adequately or responsibly during their working years. As a result, they are not prepared financially for their retirement years.

Instead they borrow and spend excessively on interest charges throughout adulthood, and end up needlessly financially ill prepared at the end of their earning years.

And for those few who do manage to save and invest adequately while working, most either (1) don't own enough stocks or (2) trade excessively and expensively on the advice of conflicted commissioned brokers.

So when the market swings widely from time to time, which it inevitably does, they are likely to sell and then later buy back those same or similar shares after the dust has settled and share prices have recovered. Either that or they just decide to stay away from investing in stocks forever.

Individuals use lawyers and doctors when appropriate, and they do this out of  necessity. The same logic applies to saving, investing and borrowing. But in the case of financial management, it's an ongoing process where solid advice on a continuing basis is essential to the individual's long term financial well being.

And that brings us to today's dilemma. Most individuals don't have financial advisors because (1) the advice offered is sporadic, (2) costs too much or (3) isn't appropriate for long term oriented individual savers and investors.

That's too bad, but that's the truth. It's become a damned if you do and damned if you don't problem with huge ramifications.

Burt Malkiel knows why investment costs are falling fast has this to say about some positive trends developing on the cost front:

"Burt Malkiel has been around stock markets a long time. He has seen money managers and investing styles come and go, lived through crashes and recoveries and written bestselling books on investing along the way.

He's learned one thing for certain, he says. Costs hurt. "The only thing I'm sure about in investing is the lower the fee I pay, the more there's going to be for me," says Malkiel, author of the classic A Random Walk Down Wall Street . . . .

Investment costs are still falling, as Malkiel recently pointed out. "Fees have come down, on average, because fees for index funds are so much lower than active funds, and people have moved to them," he told The New York Times.

Morningstar recently weighed in on the trend, noting that asset-weighted expense ratios across all funds — not just index products but certainly including them — hit 0.64% in 2014, compared to 0.76% five years ago. This was being driven by investor choice, they noted.

However, the researchers concluded, the lion's share of the cost savings was to the benefit of the funds, not necessarily investors. The clear implication is that investment fund fees have room to fall by even more.

Plain disclosure

The winner in all of this has been Vanguard Group (Malkiel was once a board member there). How long before the brokerages and big fund providers that compete with Vanguard throw in the towel and cut costs deeply to keep up?

Competition is a fantastic force for good in the retirement business. For decades upon decades, stock brokers have blithely lifted a third or more of retirement savers' returns in the form of fees.

The conflicts of interest have been obvious for a long time. Only now is Washington preparing to do something about it, namely by proposing to make the fiduciary standard common to all retirement advisors.

We're not against money-management fees, naturally. But we do believe that fees and commissions should be plainly disclosed and that advisors should be required to act in the best interests of their clients.

And we believe that the real value of a financial advisor is not picking funds or picking stocks. "This wouldn't hold if active funds were getting a higher post-fee return," Malkiel said. "But the evidence is abundantly clear that they're not."

On track

So why pay fees at all? For portfolio construction, rebalancing and actual financial guidance — if you feel having an advisor will keep you on track. We recognize that some investors are fine with so-called "robo" advice. Others, however, will want a human partner along the way.

But nobody should be pay high fees in hopes that someone can beat the market for them. As Malkiel would say, the data doesn't support the effort — and certainly not the added investment costs."

Summing Up

Some people can outperform the market. Most can't.

Having a cost conscious and trustworthy individual financial advisor is a money making idea but not for the purpose of 'beating the market.'

A great deal of money can be not spent and thereby saved and earned by individuals making the simple and right moves and non-moves from time to time.

By acting rationally and intelligently over time --- not emotionally or because the commissioned broker urges panic buying or selling, or the neighbor or co-worker has a hot tip that 'can't miss' --- the individual saver and investor can end up with that 'pot of gold' --- except it won't be gold.

It's the long haul that matters for individuals and that begins with education and knowledge, including financial education and knowledge.

So team up with someone you know and trust, and who knows the score financially.

Then make the effort to learn and know what's what. It's not that hard to do. In fact, it's both fun and profitable.

That's my take.

Thanks. Bob.

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