Posted August 2nd, 2012
Investing in index funds is a hotly debated topic amongst investors. I am biased I suppose, but I do have to wonder why?
Index funds are generally managed by computer systems. You can self-direct, but if you’re not a worldly-wise investor (the term “index fund” may even mean nothing to you), then working with a financial advisor is key to helping you research and develop an all-weather portfolio.
Be careful though. There are advisors, trading in index funds, who will want to sell you a particular product as they are paid handsomely to do so. This being the case, these particular commissioned – JP Morgan funds for example – have a higher brokerage fee which therefore often means a higher implementation fee and higher annual commission.
An Independent Financial Advisor is, or at least should be, just that. Brokers selling his or her companies own commissioned funds will have a vested interest in selling you a particular company’s fund. Kind of like a Ford dealership selling you a Ford car and you pay more for the privilege. However, the independent chap across the road could sell you a Honda, Ford, Toyota…….without having any particular loyalty to any manufacturer. He’d be more likely interested in selling you a car that suits you. The analogy breaks down when we realise that ultimately both car salesmen are looking to sell you the car that suits their company’s bank balance. That is business after all.
But then, the business that is at least as interested in their customers wishes as they are in their own profits do tend to have a habit of sticking around. The fact is, for an IFA, this is absolutely paramount.
One of the underlying principles of making investment strategies work is making sure they are tailored and bespoke to each individual client. My experience tells me that this really does work.
No two clients are ever the same. Let’s say Mr A and Mr B came to me looking for advice on investing similar amounts of money. Once I have talked with the clients about their hopes and plans for the future we see that the strategy that would work for Mr A may not suit Mr B at all. Because an Independent Financial Advisor isn’t getting paid commission by a company to sell products, then I’m not going to sell Mr B something that won’t work for him, simply to help turn a profit. And that profit may be something Mr B never sees anyway because of the exorbitant fees involved.
Beyond that, there is little human interaction in passively managed index funds. Because we can leave computers to track an index, it means there is less managing to do which means lower costs for clients.
image credit: flickr.com/Hugo90