Investment Company 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 the advice worth your time and money? Should you consider turning to an investment company that provides the option of using a robo-adviser?

In October 2018 Consumer Reports published its Ratings of Investment Companies about what these firms really provide to their customers—and how customers value those services. Our findings were based on a survey of more than 46,000 Consumer Reports members about the experiences investors had with the investment companies they use.

Highlights of Our Survey

Our members were generally satisfied with the customer service and professional advice provided by their investment companies. The survey covered traditional investment companies (a group that includes brokerages and investment adviser firms that offer personalized, professional advice to those with diversified portfolios), as well as online firms and robo-advisers.

Online firms led in overall satisfaction, with 88 percent of survey participants giving their firm high scores, followed by traditional investment firms (80 percent) and robo-advisers (80 percent). Edelman Financial scored well among traditional investment firms, while Vanguard was a standout among online brokerages.

But Consumer Reports members were generally less satisfied with their firm's fee transparency. Only 5 percent of traditional investment firms were rated favorably on this measure. Some two-thirds of online investment firms and 43 percent of robo-advisers were rated favorably on fee transparency. 

Given these fee transparency issues, it's not surprising that four out of 10 of those surveyed weren’t sure of their approximate annual costs. Traditional investment firm customers were the most uncertain, with 46 percent unsure of their expenses vs. just 34 percent of online customers.

Many members were unhappy with the amounts being charged. Only 5 percent of the traditional investment firms were rated favorably on costs. By contrast, 83 percent of online firms and 70 percent of robo-advisers were rated favorably for their fees. 

Overall six out of 10 investors received advice from a finance professional at their firm. The majority of traditional investment firm customers (80 percent) got help, but only 35 percent of online customers reported receiving any advice from a pro.

Our survey includes data for 50 investment companies: 37 traditional investment companies, 6 online firms, and 7 robo-adviser firms.

Our survey also showed that:
•  Many investors did not rate their firms highly on helping them meet their financial goals, such as building wealth or saving enough to generate retirement income. About half of traditional investment firm customers gave their company a favorable grade on this measure. And just 33 percent of online firm customers, and 29 percent of robo-adviser investors rated their firms favorably in this category. 

•  More than half of online brokerage customers (52 percent) trade actively. By contrast, only 21 percent of traditional investment firm customers engage in active trading.

•  Self-reported returns on investments for the twelve months preceding the survey (fielded between July 24 and September 6, 2017) indicate a median growth of 8.3 percent across all accounts.

•  Among members who have accounts with both robo-advisors and traditional investment firms, the majority (61 percent) say robo-advisers are better for fees.

Our Members' Portfolios
The median amount invested by these respondents is $344,781, ranging from $367,210 for traditional investment firm customers to $138,376 for those working with robo-advisers.

More than one-third of survey participants held four or more different types of funds in their portfolios. More than four out of 10 survey participants own individual stocks and 36 percent held bonds. About one fifth of those surveyed held only IRAs, non-indexed mutual funds, or a combination of these two types of investments. 

Top-Rated Investment Firms
Each category of investment firm had at least one highly rated company. Among traditional investment firms, nine companies scored especially well, including Edelman Financial, Baird, Fisher Investments, and Thrivent Financial. In the online category Vanguard, USAA and Charles Schwab received top scores, and among robo-advisers, Vanguard Personal Advisor Services was the standout.

Time to Consider Using a Robo-Adviser?

For many investors, robo-advisers offer services 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 a benchmark 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 annually for an account and requires a $500 minimum.  At Betterment, another big robo-adviser firm, you would pay 0.25 percent for an all-digital account with no minimum, while those with portfolios of $100,000 or more are charged 0.4 percent, which gives you access to human financial advisers.

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

Earlier this year, a Labor Department rule that would have created stricter standards for financial advisers was put on hold. This so-called fiduciary rule would have required advisers to act in their clients' best interest with retirement accounts. 

The demise of the fiduciary rule raises the risk that your adviser may have conflicts of interest. An investment recommendation for your IRA, for example, might pay the adviser a hefty commission but that may not be the best possible choice for your financial goals.

Still, there are plenty of options for finding a financial adviser who will put your interests firsts—and not just for retirement accounts but your overall financial life. But you will want to vet the candidates carefully. Here are some questions to ask before you sign up with an adviser:  

•  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?
•  Will you sign a statement saying you will always act as a fiduciary and act in my best interests?

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. Most investors would do better to avoid them and instead max out their other savings options. If an adviser recommends an annuity after just meeting you—and before doing an extensive analysis of your finances—find someone else.

Focus on Proprietary Funds
You may receive recommendations that include mainly funds from the investment company where your adviser works. 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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