You want to invest in the stock market.
Should you go with a brokerage firm, a financial adviser or roll the dice yourself?
A recent study that looked at the cost and performance of 4,000 mutual funds found that people who invested on their own ? sometimes with the help of a financial adviser ? faired better than those investors who allowed a brokerage firm to manage their investment.
The study, “Assessing the Cost and Benefit of Brokers in the Mutual Fund Industry” was written by two professors ? Daniel Bergstresser and Peter Tufano ? of Harvard Business School and John M.R. Chambers of the University of Oregon.
They found that individuals who go with a brokerage firm often spend a lot of money on fees and commissions when a mutual fund is bought or sold.
The authors wrote: “It is unlikely that the benefits of brokers lay in their superior mutual fund choices, asset allocation decisions or superior cost management for the investor.”
Sometimes, brokerage firms recommend investors go with an “in-house” fund ? set up by the brokerage firm? that pays the broker a commission for steering investors to it, according to Kirk Kinder, a certified financial adviser with Picket Fence Financial in Bel Air.
“The biggest reason broker-sold funds are underperforming is that the investor pays so much in fees,” Kinder said adding that fees typically range from 1 percent to 1.5 percent.
Going with the “in-house” fund may cost the investor in fees and commissions, Kinder said.
Investors paid brokers as much as $3.6 billion in “front-load” fees when they bought mutual funds and $2.8 billion in “backload fees” when they sold mutual funds as well as $23.8 billion in investment management fees and other expenses, according to the study.
Funds bought by people out performed broker-sold funds by about $8.8 billion in 2002, the study said.
About 4,000 mutual funds active from 1996 to 2002 were reviewed in the study.
In response to criticism, some brokerage firms, such as Citigroup, have sold off their “in-house” funds, said Alexander Samuelson, a spokesman for Citigroup Smith Barney said.
Economics professor William Lord, of the University of Maryland, Baltimore County, suggests that individuals should park their money in an “index” mutual fund that focuses on Standard & Poor?s 500 Index.
But he added: “If you have a taste for trading stock, there is no reason not to trade on your own account through a brokerage firm.”
