The world of investment reviews can be a lot like going to grocery store to prepare for dinner. Some specialize in produce, some fish and some just have a lot of stuff. Which store should you go to? What brand and which type do you select when you get there? Some retailers have their own brand of ingredients or pre-packaged goods. Often these are value priced compared to some of the higher-end brands that they may also carry. However, if your recordkeeper (grocery store) makes their own brand of investments it likely is not the least expensive in its category. In fact, the investments never seem to have a price tag. More on that later.
Using an investment reviews service
You may use a review publication. You have read the prospectus disclaimer, “That past performance is not an indicator of future performance.” However, various investment review services provide star ratings of past performance. An effort to simplify the rating system they often use stars or some other metric that would make sense to the non-expert. Unfortunately what is five stars for one firm may not be five stars for another. That is one of the problems in selecting investments. The leading agencies Morningstar and Lipper use different methodologies.
It’s also in the interest of the investment firm to highlight their investment in the best light, so they may choose the rating system that best suits their interests. However if you serve it in your house and no one eats it or someone gets sick, you will be the one on the hook.
Investment reviews and expense ratios
Last year, my wife and I bought a refrigerator. We had no idea of the costs of raw materials and labor, wholesaler or retailer profits. I’d like to believe that the manufacturer’s profits were modest and they used the best raw materials. I would be shocked if the salesperson made the most. However, he did help sort through the myriad choices and we have been happy with the refrigerator. However if the profits to the retailer meant that the quality of my refrigerator was compromised compared to another refrigerator of similar price I’d be upset. What about your investments.
Morningstar who provides a star rating, actually has said that expense ratios are the best indicator of future performance. Investments don’t have a price tag like your grocery store. When you invest, it usually appears that all of your money goes to investing. However, how do the expenses of the firm you work with get paid? That is done all or in part in something called an expense ratio. Those costs and the trading costs reduce your return and the return of the employees that depend on your judgment.
Do you need an investment review if they’re number 1?
Many firms advertise being the number one selling brand of spaghetti sauce or cheese. That is to indicate to you that how could all these other people be wrong? You should join them. It doesn’t tell you that it is the healthiest for you or will be the best complement to what you’re serving. In fact we don’t know why it’s the number one brand. Maybe they paid the best kickbacks to the grocers which give them an advantage on the shelf and placement near the cash registers. You probably are time constrained and don’t have much time to invest thinking through all these issues. You likely grab the number one selling brand or stick with the one that you are used to using in grandma’s recipe.
Independent advisor and independent reviews
What’s in your fridge? If someone gets sick it’s your fault. Get an independent review by an ERISA 3(21) investment advisor that is a co-fiduciary. You’ve read several issues that may pull the wool over your eyes. Using an ERISA 3(21) to help you sort through and communicate it to your participants will go along way toward addressing your duties and may help increase their chances of a dignified retirement.
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