Jason Stipp: I'm Jason Stipp for Morningstar. Last week on Simple Solutions, Morningstar director of personal finance Christine Benz talked about some investment innovations that she might shy away from. This week, she's going to talk about some innovations that she finds more attractive.
Christine, thanks for joining me.
Christine Benz: Jason, nice to be here.
Stipp: So, I think sometimes we are skeptical of some of the newer products out there on the market, maybe some of the products that haven't proven themselves, but not all innovations are bad, in fact some of them have had some positive impact on the marketplace of investments. Can you tell us a little bit about some of the ones you've been looking at recently?
Benz: Jason, it's funny. There was commenter below that video that we taped last week and he basically said, "so are there any innovations over the past 30 years that you like?" And yes, there are. So, the key one I would point to Jason is exchange-traded funds.
And so ETFs offer, obviously, very low costs, oftentimes, good tax efficiency, and also superior tax efficiency characteristics on a going forward basis. And also for the person who is inclined to maybe buy an individual stock without doing his or her homework, maybe they want to be in a given sector, the ETF represents to me a much safer alternative than doing that. So, ETFs have done a lot of good things on a number of fronts.
And one of the other key things I would point to is that even for people who aren't inclined to invest in ETFs, ETFs have helped drive down costs throughout the industry. So, as we've seen these massive flows into ETFs, I think that's gotten active fund management providers to sit up and take notice and think hard about cutting their costs as well.Read Full Transcript
Stipp: Certainly, brought some much needed competition to the marketplace with some very low fees. The second one also involving mutual funds, funds that purport to do a little bit more than maybe one thing. Can you tell us a little bit about these types of funds and why you think they could be an attractive option for some folks?
Benz: Yeah, I call these all-in-one funds or solution-type funds, and the classic example would be the whole category of target-date funds, which have really taken off in the past several years. And so, these are funds that are designed to be your one-stop holding that holds all different asset classes and get more conservative as you get closer to needing to put your hands on the money.
So, I think that that's been a good innovation, of course, there have been varying degrees of success and execution--some firms have done a good, some not so good--but I think the overall idea of delivering that one-stop diversification is a good one.
Another category I am watching in this same vein is this new realm of retirement income funds, and essentially these are funds that are designed to mimic a pension plan and send investors a paycheck every month in retirement. Some of them are marrying mutual funds with annuity products. And the idea is that it gives that senior, perhaps who wants to take a hands-off approach to his or her investments, that option to get that all-in-one diversification and that regular paycheck.
Stipp: So, certainly one to keep an eye on, but overall as a class, it seems like they're very good at convenience for investors. And the last point that you have also has to do with a certain amount of convenience and how that can really bring some upside to investors. Tell us a little bit about that.
Benz: This is "auto everything." So, fund companies and various financial-services providers have looked at the data and what we see is that, investors in general tend to be very inert. So, they tend not to want to make decisions about things and by using automatic investment, automatic enrollment options, using programs that allow participants to increase their contributions as soon as they get a raise, without having to lift a finger, all of these things I think will help contribute to a better outcome for investors.
And they also, because they involve putting your investments on autopilot, also help average out your purchase prices and help keep investors from putting that big sum of money to work at what could in hindsight turn out to be a terrible time, so good idea from a number of different angles.
Stipp: So, certainly it imposes that discipline that can be hard to do, if we have to sit back and write a check for your investments every month, for example?
Benz: Absolutely. And other thing is that, even if you are investing outside of 401(k) plan, most financial-services companies are making it pretty easy to just make sure that your contribution gets withdrawn directly from your checking account or savings account. So a way to automate those contributions on an ongoing basis outside of a 401(k) plan.
Stipp: Christine, thanks for your insights on these innovations.
Benz: Thanks, Jason.
Stipp: From Morningstar I'm Jason Stipp. Thanks for watching.