The rise in passive investment products brings a trend that investors should find disturbing. By seeking out ultra-low fees, manufacturers are turning investors into consumers, and turning a service into a commodity. Index funds are financial products that come with strict explanations of how they work and the many dangers they might face. Those disclosures are there as much to protect the manufacturer as they are to inform investors. They absolve the manufacturers from responsibility if and when things ultimately go wrong, much like the warnings on a cigarette package.
Look at what’s happening. Every time the market twinges a few specialty ETFs disappear. Never to be heard from again. Where did they go? Recall the recent volatility ETFs that did not fare well as the market headed south in the fall.
And now for the coup de grace: Mutual fund giant Fidelity Investments is offering pensioners to manage their money for free. Right. As Wall Street never does anything for “free” the question one should ask is how are they making money on this? Fidelity Investments also happens to be selling itself as a fiduciary.
Our advice for investors is to take a long-term view and avoid chasing fads. Choose a long-range benchmark that’s obtainable—like the rate of inflation as this is what truly erodes purchasing power. And choose an advisor whose investment style is one that suits your long-term goals. Pick a style and stick through an entire cycle of five to 10 years, remembering that changing your course costs money. Take the time to understand the costs of changing your mind. As chasing current fads, Warren Buffet has said “you do not know who’s swimming naked until the tide goes out.” The trouble is that by then, it is too late.
Scott Schermerhorn is president of Granite Investment Advisors. Jack Willoughby is a consultant with Open-Door Creations.