This chapter is an intro to the nine financial myths and uses two specific terms for the first time
What is a Mutual Fund?
This section hints at the problems associated with an actively managed mutual fund – high fees. By definition, a Mutual fund is professionally managed – an investment programme funded by shareholders that trades in diversified holdings.
So the ‘mutual’ part is me plus the other people who invest in the fund. There’s a good description here on dailyfinance.com. The highlights are:
- The entirety of the mutual fund’s portfolio is referred to as assets under management.
- An average expense ratio for a managed mutual fund is around 1 to 1.5 percent.
- Most mutual funds are open-ended, allowing new investors to join in.
- Mutual funds make money via dividends, capital gains, and growth of the securities within the fund.
- The alternative to a mutual fund is an index fund (Chapters 1.1 and 1.2) which isn’t actively managed and has lower fees (0.5%)
What is a broker?
Investopedia has a whole page about this. The book uses the term in a way that suggest that they don’t have a fiduciary responsibility to you or me. They may be more interested in the upside for themselves or the company they represent.
Generally, a broker in the US executes buy and sell orders for their clients. Full service brokers might also offer buying and selling recommendations and other financial advice, while discount brokers simply act on the instructions of their clients.
The London Stock Exchange has a stockbroker search and lists different types of broker which seem to tally roughly with the US equivalents:
- Full service = Advisory
- Discount = Execution only
More importantly, do brokers have a fiduciary responsibility to their clients?
This WSJ article of April 2014 suggests that they currently don’t act in that capacity in the US – although it may be in the pipeline.
This article about fiduciary duties in the UK of June 2014 suggests that the US is, in fact, leading the way in fiduciary regulation.
The long and short of it is that the book recommends low-fee index funds over actively managed mutual funds – which makes the whole broker fiduciary responsibility question a non-issue.
Once again, my action plan is to choose a good IFA (Chapter 1.1).