Investment Company Buying Guide
Getting Started

Whether you're a seasoned investor, a newbie, or someone retesting the waters after a scary loss, financial-services companies want your business. But aside from potential incentives, what will you get for moving your accounts? Is the service up to par? Is free advice worth your time? Should you consider turning to an investment company that provides the option of using a robo-adviser?

In September 2016, Consumer Reports Magazine published its Ratings of Investment Companies about what they really provide to their customers—and how customers value those services. Our findings were based on a survey about their experiences investors had with the investment companies they use.

Highlights of Our Survey

Our readers were generally satisfied with the services provided by major investment companies.  Vanguard, the mutual-fund giant, scored very highly overall among both large investors (those who have more than $500,000 invested) and small investors (those who have less than $500,000 invested).

Nearly one-fifth (19 percent) of all accounts include investments in ETFs (Exchange-Traded Funds), but only 4 percent of all portfolios contain investments in ADRs (American Depository Receipts) and commodities, respectively.

There were several different motivations for investing with specific firms. The leading goal among the respondents to our survey was overall financial security and wealth (74 percent). Saving for retirement was also mentioned in a majority (58 percent) of cases, followed by generating revenue during retirement (42 percent), and investing advantageously for tax purposes (25 percent).

Self-reported returns on investments for the twelve months preceding the survey (fielded between April and June of 2015) indicate a median growth of 7.8 percent across all accounts, with 94 percent showing at least some increase in the value of their accounts.

Respondents to our survey told us that:

*They seek and receive personal advice from a finance professional in only 43 percent of all cases;

*Active trades are relatively uncommon, executed in only 36 percent of all accounts; and

*One-quarter (25 percent) of all investment portfolios are largely risk-adverse, containing only non-indexed mutual funds or IRAs.

Our Readers Rate Investment Companies
Notably, our Investment Company Ratings reflect the experience of small investors (those with under $500,000 invested). Of our readers, they had a median of two different investment instruments.  At least one-quarter included the following types of investments: IRA, Non-indexed mutual funds, individual stocks, cash, bonds and indexed mutual funds.

Vanguard Leads in Satisfaction
Among small investors, Vanguard and Dodge & Cox, were rated more favorably than 60 of the 67 rival firms. USAA and T Rowe Price also received high overall satisfaction scores and got high marks on all attributes across the board. At the other end of the spectrum, Citigroup was rated less favorably than all other firms and was the only one to get dinged on each of the five attributes. Putnam and Invesco don’t fare much better, with less favorable ratings than the overwhelming majority of rival firms.

Large investors were very satisfied with all of the firms we rate. But Vanguard beat out each of the other 30 firms in our Ratings and is the only one to get a top mark for returns on investments. T Rowe Price and USAA also performed especially well in our Ratings, besting a majority of their competitors.

Return on Investments

Nearly all investors report some measure of growth in their accounts (94 percent overall, 92 percent among small investors, and 97 percent of large investors). The overall median rate of return on investments for the year-to-year period prior to the survey, based on self-reports, is 7.8 percent.

Differences between small and large investors are modest: 7.6 percent for small investors and 8.3 percent for large investors. In dollar terms, however, this means that the typical small investor realized a gain of $11,400 in the past 12 months, given the median amount invested, whereas the typical large investor sees his/her assets increase by a median value of $74,700. The scope of this dollar difference may provide our best understanding of why large investors are significantly more satisfied with their returns than small investors are with theirs. Controlling for a wide range of factors (e.g., amount invested, specific goals, ratings of online reports, trader status, and specific types of investments), 77 percent of large investors are highly satisfied with their returns on investments, compared to 62 percent of small investors.

Moreover, satisfaction with returns on investments increases in the expected direction with self-reported gains or losses in the values of investment accounts. Among those with the greatest reported gains (i.e., 20 percent or more), 89 percent are highly satisfied with returns on investments, whereas among those with zero growth or losses, less than a third are highly satisfied, respectively.

Time to Consider Using a Robo-Adviser?

While more investors are turning to robo-advisers to handle their investments, they still manage a sliver of all invested accounts. As a result, they were not reviewed in our survey or included in our Ratings.

But for investors interested in using a robo-adviser to manage their portfolios, we learned a great deal. Among our findings was that robo-advisers offer investors a solution that may be better and cheaper than using a human adviser. They do this by primarily using computer algorithms to select investments for you. They charge just a fraction of the cost of a human adviser—about 0.15 to 0.5 percent per year, depending on how much you invest. Most robos have little or no investment minimums, so you don’t
have to be mega-rich to benefit from their advice.

Robo-advisers recommend portfolios made up of low-cost index mutual funds that track the shares of an index like the S&P 500, and exchange-traded funds (ETFs), which are similar to index funds but trade more like a stock.

One big robo-adviser, Wealthfront, for example, charges just 0.25 percent per year for accounts over $10,000 (smaller accounts are free), with a $500 minimum investment. At Betterment, another big robo-adviser firm, the fees range from 0.15 to 0.35 percent, with no minimum at all.

Bigger more established investment companies including asset management giants like Schwab and Vanguard have also rushed to catch up to the competition.

Depending on your needs, though, a human adviser may be a better option, especially if you need help prioritizing between financial goals (say, paying down debt vs. saving), and navigating tricky financial situations. 

Questions to Ask an Adviser

While savers have long been able to turn to fee-only advisers (also known as fiduciaries) who did act in their best interest, they also had the option of using commission-based advisers, such as stock brokers, who were only required to adhere to what is known as a "suitablity standard." That meant they could provide their clients with investment options that were considered suitable for their needs, but might come with high fees that benefited the advisers.

Under new rules for retirement accounts, which fully go into effect by January 2018, all financial advisers, whether fee-only or commission-based, will have to adhere to the same standards. They are required to make customers aware of their right to complete information on the fees charged and direct them to a web page or written material disclosing compensation arrangements.

Advisers will be required to charge only a "reasonable" compensation. In addition, they must avoid misleading statements about fees and disclose any conflicts of interest.

They can also be held accountable for not following the rules. If an adviser does not act in a client's best interest on an IRA rollover, for example, the client can sue for breach of contract.

Keep in mind that those rules are for financial advisers managing your retirement account. They may not apply to other kinds of accounts. Here are some questions to make sure you get an adviser that will work in your best interest.

• How are you being paid? Is it a salary, commissions, fees based on assets, hourly, or a flat fee?
• Are you looking to sell products?
• What are the transaction fees and expenses related to the recommended investments? What, if any, are the fund's 12b-1 sales fees and loads? Are the loads paid up front or when I sell the fund?
• What are the potential conflicts of interest in the funds you recommend? What, if any, is your incentive to recommend one fund family over another?
• How do you or your firm choose the funds you recommend?
• What's your educational and professional background? How much experience do you have advising investors like me?
• How will you carry out or help me carry out my plan? Will you provide a step-by-step action plan?
• How much follow-up will we have, and what will it cost?

Pitches, Hedges, and Fudges

When trying to choose an adviser keep an eye out for these red flags:

Variable Annuity Pitch
Variable annuities, marketed to pre-retirees seeking guaranteed income, are complex insurance products that can include costly embedded fees. "A variable annuity has a number of tax- and investment-related features that would demand extensive analysis before a recommendation is made," David Yeske, a certified financial planner who served as one of our project judges, said. If an adviser brings this up after just meeting you, find someone else.

Focus on Proprietary Funds
Some testers received recommendations that included mainly funds from the investment company they were visiting. No surprise there. But always ask what other, similar alternatives are available, and at what cost. You'll want funds with low expense ratios. Sometimes the house brand might be the best option.

Sealed Lips on Compensation
You have a right to know whether an adviser is being paid a salary, a commission based on sales, a percentage of the assets managed, or some other way. Ask on your first visit. And once you see the adviser's detailed investment recommendation, ask again for a full accounting of the fees involved with purchasing the investments, holding them over time, and selling them.

Target-Date-Fund Recommendation
If you don't have a large retirement nest egg, your adviser might suggest a target-date fund, which is a portfolio of stock and bond funds based on your expected retirement date. Over time the asset mix shifts to favor bonds. Target-date funds appear to be good options for investors who want to manage their own accounts with little fuss. But some target-date fund families can come with high annual fees. (Vanguard's index-based target-date funds are among the least expensive.) Ask the adviser to lay out the costs and alternatives.

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