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Investors Need More Guidance, Not More Products

Robo-advisors have only just begun, and they will not conquer all

Morningstar 13.06.2017

The mutual fund industry spent much of the past 30 years complicating its offerings. Investors have spent the past decade seeking simplicity.

The classic virtue of a mutual fund is that it’s an easier choice than assembling a diversified portfolio of securities yourself. The earliest funds were balanced funds that combined stocks and bonds to form an elegant solution for an investor seeking a simple, one-stop way to participate in the investment markets. Human nature being what it is, however, the industry was not content to let a good solution stand. Instead, it began to tinker and add more choices, but also more complexity. Funds that bought just stocks or just bonds were created. Sector funds, style-based funds, capitalization- based funds, regional and international funds, and many other innovations followed. In addition, many more management firms entered the business, greatly increasing the number of choices investors faced.

In the 1980s, this innovation shifted to new ways to price mutual funds. With the growth of the industry and the popularity of funds in individual retirement accounts came a slew of financial journalism helping guide confused investors. These publications shared a common mantra: Whatever you do, insist on buying a no-load fund. Predictably, this counsel sent millions of Americans to their brokers requesting to be sold a no-load fund. Never one to miss a sale, the industry responded by shifting around charges to create B and later C share classes that abandoned a front-end load but still offered a similar compensation level for the advisor. With these new share classes, and the many that followed, the act of choosing a fund became even more complex. Now, not only did the investor have to sort through dozens of fund flavors from hundreds of sources, but she also had to claw through a maze of different pricing options.

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