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Barbara Whelehan writes Boomer Bucks for Bankrate.com

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.

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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.

Broker vs. direct channel
The study attempts to find tangible benefits that brokers provide to their clients. Guess what? They came up dry.
 
Do investors who hire brokers or advisers:
1.Get access to special funds that
would be otherwise difficult to find?
2.Buy funds with lower costs
(excluding loads and 12b-1 fees)?
3. Hold funds with superior performance?
4. Get great advice about asset allocation?
5.Avoid falling into behavioral traps
such as chasing past performance?

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.

 
 
Next: "Clients of brokers are underinvested in long-term investments"
Page | 1 | 2 | 3 |
 
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