First of all there are more than 13000 mutual funds out there. How do you know which one is best for you? This is where the broker comes in. He/She will be able to filter through all of the different available funds and make a recommendation for you based on your risk tolerance level, investment time horizon, and overall suitability of the investment based on your investment needs. This is what you are paying for is the professional advice. The broker will be able to save you time by doing due diligence research on the type of fund and or funds that best meet your investment objective by looking at the past track record of the funds, morningstar rating, and internal cost of ownership of the funds. Of course past performance is not indicative of future results, however having a professional on your side can help you come to a more informed decision on deciding which fund best fits your individual needs.
As for the latter part of your question, I am a little confused.
Yes , brokers do get paid a commission. This is how they earn a living. The broker has to spend time doing a detailed client profile on you, and then do the necessary research to find out which investments fit your needs best. This is what you are paying for..... the service. Sure you can go out and try to pick your own funds, many people do, some very successfully. However many people don't have the know how or want to invest the time to do this. This is where brokers/financial advisors come in.Why should someone pay for finical advice when the broker is investing their money into mutual funds?
There is no evidence that managed mutual funds outperform indexes ... no proven system of any kind to beat the market ... so any broker who says they know what fund will perform better than others or the market is either confused or lying ... they are selling snake oil.
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they shouldnt! get some index funds....
I don't, I spend my free time researching stocks and funds before I buy anything. So does a financial advisor working for a broker. He may be more knowledgeable about his companies mutual funds but everything els is out there to research. If you don't want to spend the time researching and investing, you hire a financial advisor.
This is an excellent question. An average actively managed mutual fund has management fees and costs of roughly 1.5% year. These fees are withdrawn from the mutual fund by the managers - they reduce the net financial performance reported by the mutual fund. If you buy a fund like this through a broker, you might be charged an up front 2% sales commission, meaning that in year one, you have fees totalling 3.5%, and a fee of 1.5% for each year after year one.
Compare this to buying a no load index fund on your own - there would be no brokerage fee, and ongoing costs of about 0.25% per year (index funds have much lower costs, since they don't have to pay staff to research and make recommendations). In year one, you would be 3.25% ahead of buying a managed fund via a broker, and in each future year, you would be 1.25% ahead.
There is no objective proof that active management can consistently beat the market as a whole. This suggests index funds are the way to go. Why pay for active managers if there is no proof the performance is better?
Final note is that there are many indexes ... equity indexes, bond indexes, international and domestic indexes. You may want to invest in a variety of index funds to ensure strong diversification.
The advisor helps pick a suitable mutual fund. Believe it or not some 20-somethings think they should invest only in bonds and some middle income 60-somethings think they should only invest in international emerging stocks. People just don't know.
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