by echo | October 29, 2013 1:11 pm
That’s because they have a very serious duty to fulfill — the retirement obligations of thousands and perhaps millions. The room for error is zero.
Let’s consider the alternatives. Say you had to pick a money manager today, right now. Your choices are:
1. A group of mutual fund managers
2. A hedge fund or two
3. A broker
4. An insurance agent
5. Yourself, acting alone
If you go with door No. 1, the problem is going to be fund fees and underperformance. Most active funds take more than 1% of your money (some much more) and extremely few beat their benchmarks. Those who do cannot do so with anything approaching predictable consistency. So scratch that.
Behind door No. 2 — hedge funds — sits a 2% fee and 20% of your gains going straight to the managers. Great if they outperform, but the track record is hazy at best. A few hedge funds excel and the rest struggle to come anywhere near the benchmarks.
Fees are the problem at the hedge funds, but so is the “slugger” mentality. If you always swing for the fences, you’re going to pile up a lot of strikes in the process.
Ah, your broker, door No. 3. Fred, or Gary, or whatever his name is. Nice guy, really works hard on your behalf. Except he doesn’t. He’s working toward a sales quota.
By regulation, brokers are under no obligation to steer you toward investment products that serve you. They might, but it’s their choice. They need only be consistent with your risk tolerance. If he gets a fat commission out of it, well, why would you have to know that? You don’t.
Door No. 4 is your insurance agent. It’s technically possible that there exists an annuity out there, somewhere, that is in your interest to own, but it’s a diminishing likelihood. Remember, the insurance company needs to make money. Then the agent gets a cut. Then you get paid an income.
This entire pie starts out using the same active fund managers behind Door No. 1, so you start the race crawling, 20 yards behind the line.
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