Taking Control of Your Investments

Despite the bull market in stocks, many Americans are not feeling all that rich.

The majority of Americans don’t invest in individual stocks, although a much larger percentage have some kind of pension or 401(k) plan. But even these are not making most Americans rich.

Due to a lack of knowledge, and perhaps a lack of self-confidence, many people turn over their investment decisions to someone else in the form of a financial adviser. Even many retirement plans offer some form of management for your funds. At the very least, in a retirement account, you will have to buy mutual funds that always come with a fund manager.

The problem is that financial advisers do not always have their clients’ interests as a top priority. Their main interest is making money for themselves.

There is certainly nothing wrong with financial advisers making money for doing their jobs, and there are some good advisers out there. But the reality is that many of these people are just not doing that great a job while collecting big commissions.

The whole incentive structure is wrong, at least for investors. It is probably right in the eyes of the financial advisers.

As one example, an adviser may collect bigger commissions if he can get his clients to invest in mutual funds with higher fees. He may also get bigger commissions for getting clients to trade more often, moving in and out of funds. But while this is good for the adviser or money manager, what about the person whose money is actually at stake?

Sometimes these fees and commissions are hidden — or at least not very obvious to the average investor. They may not seem all that big even if they are seen, but they will eat away at your returns over time.

If you get hit with a 1% trading commission fee and the mutual fund manager is collecting another 1%, this adds up fast. A 6% annual return all of a sudden turns into a 4% return. Of course, this example is quite generous compared to many cases.

The worst part about this is that the performance of the investment adviser is often shaky at best.

There are certainly exceptions. If an advisor or fund manager can get me a consistent 20% return every year, then I would have no problem paying upwards of 5% or even 10% in commissions and fees.

But with a large portion of these advisers, you could have just stuck your money in a low-cost exchange-traded fund (ETF) and been better off.

I don’t really agree with Warren Buffett on his financial advice for the average investor — it goes against everything he has done to become incredibly wealthy. He suggests just buying and holding broad index stock market funds.

While this is not my recommendation, it would oftentimes be better than parking your money with an adviser who eats up most of your returns (if any) with big commissions and hidden fees.

Government to the Rescue

The Department of Labor is proposing new rules that would require financial advisers to put their clients’ interests above their own.

At least that is the stated purpose, but it is easier said than done.

We know how government rules and regulations often turn out. They not only do not achieve their stated purpose, but they often end up doing the opposite.

The proposed rule is more than 100 pages long, which usually isn’t a good sign when it comes to legislation or new government rules. We don’t need some version of Obamacare for our investment world.

Wall Street is opposing these rules, saying more burdensome regulations may just end up raising costs for the average American investor. Some think lobbyists have already weakened the proposal, which would not be at all surprising.

So right now we have the big players of Wall Street going against the government, or more specifically the Department of Labor. I’m not really sure I would want to pick a side in that battle, but we have to believe Wall Street will probably win out in the end.

Forgive me if I can’t get too excited about the idea of the government holding Wall Street accountable. This is the same government that has made the rules in such a way as to make Wall Street richer, while the average American struggles to get by. This is the same government that bailed out the major banks and financial institutions when things went really bad in 2008.

Technology is on Our Side

It is interesting that over time, technology and productivity can solve a lot of our problems. This problem of investors getting raked over the coals is no exception.

The Internet has revolutionized trading. It is interesting to note that Wall Street is just a symbolic name now. Big financial firms still do business on Wall Street, but we don’t have the trading floors with brokers yelling and screaming the way we used to.

Now we hit a “buy” or “sell” button on our computers. The only question is whether we do it ourselves or if we hire someone to push the button for us.

Many financial firms took a major hit in the late 1990s and early 2000s. Many investors switched from places such as Merrill Lynch to places such as E*Trade or TD Ameritrade.

If you already know what you want to buy, why pay a broker $50 to $100 for a trade when you can pay $10 or less with an online brokerage account?

You also don’t have to worry about your broker being busy or out to lunch or finding his backup while he is on vacation. If you want to buy or sell, you just log into your account and place the order.

Technology and Information

There is another way technology is helping us beat this system, and it is still developing. I can’t say the average guy on the street has come this far, but millions of Americans are using it to their advantage.

With the Internet and our current technology, we live in a global world. We can communicate with others across the world almost instantaneously, and we have a wealth of information at our fingertips.

You don’t have to buy the Wall Street Journal anymore to find out the hot stocks. You don’t even have to tune into CNBC. You can find your favorite websites and have instant access at any time. You can research almost anything on the web.

While millions of Americans continue to get ripped off by high-commission financial advisers and money managers, millions of others have figured out other ways to get their information. Sometimes it just takes a little independent thinking and a little bit of work.

For example, you can subscribe to a newsletter like The Wealth Advisory that will give you just as much information as — or much more than — many of the big shots on Wall Street. And you might pay the same amount of money in commissions and fees for one single trade in your investment account with a big-name broker.

Why not do a little research and save yourself most of the fees? You can open an online brokerage account and make the trades yourself for virtually nothing.

I really don’t know if the government’s new rules will help reduce these commissions and hidden fees in any significant way. But it is easy to be skeptical of the government helping the masses at the expense of Wall Street.

Regardless, the key here is to not depend on any one person or any set of government rules. You have to take matters into your own hands.

The government isn’t going to tell you to do your homework and open an online brokerage account and to avoid loaded mutual funds and high-cost financial advisers. The big players on Wall Street certainly aren’t going to give you that advice.

You don’t have to get ripped off over the long run like the average American. You can take your financial future into your own hands with a little independent research and thought.

Until next time,

Geoffrey Pike for Wealth Daily