Is Investing Really This Complicated?

Hidden fees? Ulterior motives?

I’ve been holding on to this NYT article since last week, because I’m still trying to wrap my head around it:

Is Your Financial Adviser Acting in Your Best Interest?

The article profiles two poorly-performing mutual funds: the Ivy Asset Strategy and the Waddell & Reed Asset Strategy. Morningstar ranks them in the 99th and 97th percentile respectively, which—unlike high school standardized tests—is a bad thing.

But investors are dropping the Ivy Asset Strategy a lot faster than they’re dropping the Waddell & Reed Asset Strategy.

Given that both funds come from the same family — the Ivy fund is a product of Waddell & Reed, and they have the same portfolio managers — it might seem to be a curious question why one dysfunctional family member is being battered more than another.

First of all: domestic violence puns are gross. But let’s keep going:

The answer, however, is in plain sight, and of importance to investors: The Waddell & Reed version is sold by Waddell & Reed representatives to their financial advice clients. The Ivy fund can be bought by anyone — and those independent advisers seem to have told their clients to get out of it.

In other words: Waddell & Reed financial advisers are selling a 97th percentile fund to the people paying them to make solid investments. This looks like it’s going to be a story about the importance of finding a fiduciary adviser who is charged with acting in your best interest, but it’s not that simple:

Even advisers who act under the fiduciary standard can receive so-called soft dollars from the custodian holding their clients’ money or from mutual funds or exchange-traded funds that want to encourage them to sell more of their fund. The fund may be ideal for clients, but it is the appearance of conflict that calls into question the adviser’s motives.

I keep reading this piece, and every time I have more questions. We’ll start with the easiest one: I looked up “soft dollars” on Investopedia, and got this:

The term soft dollars refers to the payments made by mutual funds (and other money managers) to their service providers. The difference between soft dollars and hard dollars is that instead of paying the service providers with cash (i.e. hard dollars), the mutual fund will pay in-kind (i.e. with soft dollars) by passing on business to the brokerage.

Okay, maybe that wasn’t the easiest one.

But the point, as far as I seem to understand it, is that financial advisers—even fiduciaries—are motivated to push specific funds. Some of these funds perform more poorly than an individual investor may want; other funds can include higher fees than the individual realizes they’re paying. (The article explains why in more detail.)

Also, there’s a whole pile of funds that are not available to the general public—but I kinda knew that one already.

The point? I’m not sure. Investing is complicated, or at least I seem to think it is because I haven’t done very much of it and because articles like this imply that anyone who tries investing is going to get cheated somehow.

No matter how much you earn on your investments, this piece seems to say, you might have been able to earn a little bit more—especially if you do what the NYT calls the “continuing, exhaustive and dispiriting” work of figuring out where your money is actually being invested and how many fees you’re paying on those investments. You know, the work you thought you were paying an adviser to help you with.

What do you all think of this NYT article? Is it worth the ten times I’ve read it so far? Is there something I’m missing? Should I just stick with my plan to buy and hold low-cost index funds?

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