I am currently enrolled in a Personal Financial Planning course. While the rest of my financial coursework involved discussions about corporate finance, this is a nice change of pace and is an elective that satisfies a portion of my overall degree plan. Each week, the professor posts an article on our class discussion board and asks for our thoughts and opinions. This week's article, Fund Firms Lower Bar For Younger Investors, ignited an interesting discussion about whether or not these mutual fund firms were benefiting or preying on the young workforce. Take a look:
Mutual-fund firms have a new message for young investors: Stop whining and give us your money.
In an attempt to attract the next generation of customers, Wall Street is rolling out a host of new offerings designed to squelch the excuses that keep many 20- and 30-somethings from investing outside of their 401(k) plans.
Can't afford the hefty four- and five-figure minimums required by many mutual funds? They'll slash the minimum investment below the cost of an iPod. Not sure which funds to buy, and in what amounts? They're launching all-in-one products that take much of that work off your hands. Don't know how to save for a car, a house and that far-off mirage called retirement? They'll deluge you with online tools and easy-to-enroll individual retirement accounts.
Charles Schwab Corp. this year cut the minimum investment on its Schwab funds to $100, from a typical range of $2,000 to $2,500, and created a streamlined IRA with low investment minimums aimed at younger people. Late last year, American Century Investments rolled out an investment program for younger clients that includes $500 minimums on certain funds, while Fidelity Investments launched an online tool that helps new investors develop a simple financial plan based on their answers to five questions.
Meanwhile, fund companies like Vanguard Group and T. Rowe Price Group Inc. have recently launched new all-in-one "target date" retirement funds designed for people retiring in 2050 and beyond. Such funds automatically shift to a more conservative mix of stocks and bonds as their target date approaches.
Right off the bat, this sounds great! I'm all for anything that encourages people to begin investing and thinking about their future earlier. Of course, just thinking about it isn't enough. I know from first hand experience that there are more goals than dollars to meet them. In other words, my goals are competing for the same dollar. I personally have student loans to pay off, a home down payment to save for, a retirement fund that needs actual funds, and the normal everyday expenses that you face as well.
But the new products can have pitfalls. Target-date funds offer convenience but can also be expensive and too conservative for many younger investors. Some of the firms trying to lure beginner investors tack on extra fees to accounts with lower balances. And clients may need to give up certain services, like paper statements, in order to qualify for low-minimum investment programs.
The new offerings represent a significant shift for financial-services firms, which in recent years have focused largely on the massive and profitable pool of baby-boomer clients. But as boomers age, the firms need to attract new customers, and they say they can help address the myriad financial challenges confronting younger investors, such as paying off credit-card debt and student loans, and saving for a house, their kids' college education and retirement all at the same time…
Ok, so this is where the debate begins. Classmates argue that these one-type-fits-all funds are taking advantage of the young and ignorant. Extra fees, investments that aren't exactly tailored to the risk level and time frame best suited for an individual to meet his or her individual goals, and lack of service seems to scream that we are being taken advantage of!
Ok, maybe. I can see their point. Afterall, my classmates and I are in a Personal Financial Planning course. We are not the average 20 something. I personally did quite a bit of research before deciding to plop 4% of my gross salary into my company's 401(k) (just enough to get the match) and 7% into a Roth IRA. I actually put the 7% into one of these "reduced starting amount" mutual funds. By signing up for automatic payments, I was able to start investing with only a $100. But, like I said, I am not the average 20 something. So with that in mind, I think at worst, these funds are still a better alternative than the young blowing their money on "toys." At best, these funds are giving incentives and encouraging my generation to invest; people who may have previously thought investing was only for "rich" people.
Since this is my first post, I doubt I have many readers who wish to comment. But if you are out there, I would love to hear what you have to think!
[...] Read the rest [...]