 Do-it-yourself
investors win the race | You've heard the fable about the hare
and the tortoise. The hare makes a snide remark to the tortoise about his torpidity,
so the tortoise challenges the hare to a race. At the starting line, the hare,
confident of winning, treats the matter as a joke and takes a short nap first.
The hare plans to pirouette past the tortoise in a spectacular flourish at the
finish line. But when he awakens from the nap, he discovers that the tortoise
had already won the race.
If you had to place a bet without knowing the outcome of the race,
you'd likely put your money on the hare.
In a race for the best mutual fund returns between
do-it-yourself investors and those who get guidance from financial
advisers, you might expect the latter to win. After all, they're
receiving the benefit of expert advice. They likely have access
to special mutual funds with complex investment strategies or funds
that are smaller and lesser-known. Their advisers hypothetically
would select funds with better risk-adjusted returns and lower costs
(excluding loads, of course).
Plus, they'd give their clients better advice about
asset allocation, which is the primary driver of portfolio performance,
according to a well-known landmark study published in 1986 in the
Financial Analysts Journal.
Meanwhile, individual investors
without the benefit of this expert advice would lumber along slowly, achieving
dull returns in a futile race. Right? Nope. In fact, two recent
studies arrive at the opposite conclusion: that do-it-yourself investors do better
without help from the so-called experts. The
'study of the decade'
One of the studies promises to reverberate
through the advice community for many years to come. Research scientist Dr. Donald
Moine, in a recent article published by Morningstar, called it the "study
of the decade," and he likened it in importance to that asset allocation
study published two decades ago.
Three academics, two from Harvard Business School
and a third from the University of Oregon, published a working paper
called "Assessing
the Costs and Benefits of Brokers in the Mutual Fund Industry."
The study analyzes mutual fund data from two channels: The "direct
channel," which consists of no-load funds that investors can
easily buy through fund supermarkets (i.e., Fidelity, Vanguard,
Schwab, T. Rowe Price, etc.), and the "broker channel,"
consisting of funds that are sold only through advisers. After compiling
the data, the authors attempt to answer five questions.
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| Broker vs. direct channel | ![]() |
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| The study attempts to find tangible benefits that
brokers provide to their clients. Guess what? They came up dry. |
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| Do investors who hire brokers or advisers:
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1. Get access
to special funds that would otherwise be difficult to find?
Brokers do put clients' money in newer funds that are smaller and
in other types of funds that are not so easy to understand or find,
such as those not yet covered by Morningstar, those that invest
overseas or actively managed funds. However, they also tend to place
more of their clients' assets in money
market mutual funds. Their clients'
portfolios held 30 percent on average in cash equivalents versus
22 percent in the direct channel. Clearly clients don't need to
pay for advice from brokers to put their investment money in money
market funds.
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