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The financial futures of many Americans are being fretted away by brokers and banks.
A recent article by author Dan Solin titled The Average Returns Myth describes the hysteria of active mutual fund managers as they continue their mission of selling investors what might be called “The Black Box Hoax”. That is, brokers and banks want you to believe that they have” special knowledge”, i.e. a “black box”, and they are willing to let you in on this knowledge via their expensive packaged investment products.
The premise is that through superior financial analysis, their firm can identify which asset categories, (and fund managers), will provide stellar returns in the future and which won’t. It’s a huge fairytale with disastrous long-term consequences for many investors.
Indeed, even with the weight of evidence strongly favoring passively managed funds, majority of investors still allow themselves to be victimized by what Solin calls “a desperate lie”. The cost of these errant choices to the investing public is almost unfathomable.
Just last year, the White House Council of Economic Advisers estimated that conflicted advice (the kind brokers and banks provide), cost retirement account investors $17 billion per year! Brokers and banks push their “black box” actively managed mutual funds despite scant evidence that this works. Sure, it works for them through excess fees and commissions, but not for investors.
Losing both time and investment returns are core reasons for the growing percentage of Americans who are poorly prepared for retirement.
The Center for Retirement Research at Boston College publishes the National Retirement Risk Index (NRRI) . The NRRI measures the percentage of households at risk of being unable to maintain their standard of living in retirement, (what we call “shortfall risk”). Their most recent study states that 52% of households are “at risk”. Sure, lack of savings, behavioral mistakes and other issues contribute to this equation, but falling prey to “The Black Box Hoax” is a big part as well. “Shortfall risk” is arguably the most daunting financial issue facing Boomers and those on the shoulder of the Boomer cohort.
There is a better way. Don’t follow the crowd, but instead follow the long-term evidence and invest that way. Instead of relying on “sales advice”, seek out and establish a long-term relationship with a fiduciary advisor.