Investors face a major problem investing in mutual funds, because those funds have a serious conflict of interest, says John Bogle, the legendary founder of Vanguard Group.
The conflict is that while mutual funds are supposed to generate the highest returns possible for investors, they also seek to maximize profits. And maximizing profits means imposing hefty fees, which lowers returns.
"There's a dollar-for-dollar conflict between the two," Bogle says, according to
CNBC.
Part of the problem is that investors don't stand up for themselves, he said. As long as they're making money, they're happy. "In my experience, investors are much more interested in absolute returns than relative returns," Bogle notes.
"If you had a crowd of investors who said, 'Look, this is just wrong,' directors would have to listen, whether they want to know or not."
Meanwhile,
New York Times reporter Paul Sullivan offers a list of issues to focus on when assessing your financial adviser. And it's not just a matter of returns, experts say.
"Returns are a piece of the puzzle," Tom Robinson, managing director for the Americas at the CFA Institute, tells the paper. "But I'd probably look at those last."
The list includes:
- Expertise and Personality. "A tough question to ask your adviser is what he or she really knows. You may be with someone whose advisory practice does not match your needs," Sullivan writes.
- Conversations. Is your adviser available when you need him/her? Is your adviser honest in assessing your financial performance and situation?
- Responsibility. Eleanor Blayney, consumer advocate at the Certified Financial Planner Board of Standards, tells The Times you should ask yourself: "What decisions has your adviser helped you make this year? What decisions have we made together? What can he help me with? If it's just going to be decisions about buying and selling, you may want more."
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