Kim Snider
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January 05, 2005

Buying Mutual Funds Through Brokers a Bad Idea

Of course, I think buying mutual funds is a bad idea period. I am certainly not circumspect about my dislike of mutual finds as an investment, particularly the actively managed kind, and the data that supports my belief. But a new study finds that if you are going to buy funds from a broker, you are probably going to pay more and get worse performance than if you buy them direct from the fund companies.

 

In a study of over 5000 funds, the funds bought directly through the mutual fund companies (think Vanguard) trailed their benchmark averages by 1.07%, on average, each month, while the funds sold through brokerage houses underperformed by 2.282%. The article notes that is before any loads.

 

That is a pretty big performance gap.

 

Why the gap? The authors of the study conclude that investors using brokers pay extra to buy funds that already have higher expense ratios than the direct funds. And according to the study's authors, "The funds they buy [in the broker channel] underperform those in the direct channel even before deductions of any distribution related expenses."

 

In addition, the study finds that some of the more intangible benefits you might expect to get from a broker aren't supported by the data either. They found no evidence of better asset allocation and the funds brokers put their clients in "exhibit substantially greater trend chasing behavior."

 

One of the study's authors, University of Oregon finance professor John Chalmers concludes:

 

Our paper shows that the service the broker provides is probably not helping you pick a mutual fund that will have better performance. We speculate that the benefit is more likely to be psychological or the time-saving benefit you would achieve from not having to make these decisions.

 

Do you buy mutual funds and if so, do you buy direct from brokers? Do you buy from brokers expecting to get better performance than managing your investments yourself? What keeps you from taking on the management of your own portfolio? Your comments are welcome. You can post them below.

 

SOURCES:

 

1. Lawrence C. Strauss. "Fund of Information: Who You Gonna Call?" Barron's 20 Dec 2004, F2. http://online.barrons.com/article/

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.

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