Don't Pay Commissions on Target Date Funds - Do It Yourself
I am not a big fan of target date funds. However, they are marketed hard by mutual funds companies and would rather you know the dos and donts of investing in them. This piece is on paying commissions. Don't do it! Let's back up a minute and define a target date fund. These funds are designed to take your investment dollars and adjust your investments each year for risk as you get close to retirement. For example, let's say that you are going to retire in 2030. Then the fund would invest your money in the right balance of stocks and bonds based on your proximity to retirement. In theory, the closer you get to retirement the less risk that you take. The fund adjusts the risk for you as you get closer. As a review, I don't like them for the following reasons:
- They assume that just because your are younger you can afford to take a great deal of risk - What if you are in your 20's and you are a conservative investor? It won't matter, they are going to invest aggressively based on your age.
- Oftentimes, these funds are not true to their mandate and take much more risk than they should.
- This is marketed as a do it yourself cure all approach. You just invest and forget about it strategy. First, there is nothing that works all of the time. You never want to take an invest and forget approach with your investments.
- Risk is based on more than just age.
You certainly don't want to pay commissions for something that you could easily select and is a strategy that adjusts automatically. For example, companies like Fidelity Investments have a conflict of interest because they offer these target date funds on the commission side of the business and the no load side (no commission) of the business. In other words, you can go to the no load side of Fidelity and invest for yourself at lower fees and no commissions. You could invest with an adviser and pay 4 to 5% upfront in a commission for the same identical fund. However, on the no load side, you don't pay a commission. To make matters worst, the internal expenses of the fund are even higher on the adviser side than on the no load do it yourself side.
Bottom line - don't pay a commission for a strategy that is supposed to run itself and that you can pick based on your chosen retirement date. Any novice investor can make this investment. What value is an adviser bringing to the table that warrants a commission being paid? It is a conflict of interest that Fidelity has both options available. No adviser should be paid a commission for recommending a target date fund. The regulators have a lot of work to do if they are going to get rid of the conflict of interest problem in the industry.