With big powers come big responsabilities. If you’ve read about the Sword of Damocles or simply watched Spider-Man, you’ve probably heard the saying.
It is especially true in the modern age of investing. You no longer need a broker to buy and sell stocks. You can even do it in real-time, for free, right from your phone.
Competition for your business is fierce. There are more investment options than ever before. But more independence can be confusing and lead to hard-earned lessons if you don’t get some guidance or at least do some good research.
If you’ve ever tried a bag of Jelly Belly candy, you know that not all options are good. (Peach and cherry are much better jujube flavors than licorice and buttered popcorn.)
In this article, I’ll tell you which entities money expert Clark Howard considers the licorice of investing, why high fees can crush your retirement stash, and which companies Clark recommends to invest in.
Where not to invest: 3 places Clark warns against
If you’ve spent considerable time listening to Clark, you’re probably familiar with how deeply he despises big banks.
Whether it’s his penchant for “cutting his customers’ paper to death” with small fees, his “no customer service” – or, lately, his use of Zelle – Clark constantly files grievances against these institutions.
In a recent podcast, Clark imitated Elon Musk in saying that if he is mysteriously taken out, you know who to blame: the banks. That’s because Clark said that banks are enemy number one when it comes to investing.
“You never, ever, ever – ever – invest with a bank,” says Clark.
“Do you think Jesse James knew how to get money out of banks? Let me tell you how the banks are going to take it from you if you make a retirement account or HSA with them. They are not where you go unless you are feeling really charitable and want less money.”
And according to Clark, “Where else should you never go? an insurance company”.
Clark often reports investments gone awry, involving insurance salespeople sticking customers with high-commission products that line their pockets, not yours.
“And the last place you shouldn’t go: any bank-affiliated brokerage,” says Clark. “Because it’s not as bad as doing one of those things directly with a bank. Only almost so bad.”
So there it is. According to Clark, you should never invest in a bank, insurance company, or bank-affiliated brokerage.
High fees crush your investment portfolio
A listener recently wrote to ask Clark a question about investing.
The person read one of those articles about investing a certain amount of money for a certain number of years to become a millionaire. They were belatedly starting to save for retirement.
If I double the amount of money per month, the person asked, Will I accumulate $1 million in half the time?
Unfortunately not, as Clark pointed out. The most powerful force in finance is compound interest. Often what matters most is how long you can allow your money to compound.
Outside of time, the other important variable is your annual return. Over many decades, investing in the S&P 500 will provide a better return than long-term bonds.
Most people focus on which invest instead of Where invest. But the same investment in two different companies can make a difference of tens of thousands or even hundreds of thousands of dollars to the typical retirement nest egg.
Let’s take a look at how much money a small difference in rates can make over a long period of time. We assume an opening balance of $10,000 and an additional $15,000 in annual contributions with an average rate of return of 8%:
|Fees||10 years||20 years||30 years||40 years|
|0.1%||Fees: US$ 1,526.86
|Fees: US$ 120,616.45
Balance: US$ 4,293,344.37
|Fees: US$ 92,889.20
Balance: US$ 4,118,968.38
|Fees: US$ 180,949.67
Balance: US$ 1,754,864.92
Balance: US$ 3,844,953.77
Results: Fees can make a shockingly large impact
In this scenario, over 40 years, the difference between the annual rates of 0.1% and 0.5% is equivalent to US$ 448,390.60. That’s a little more than the average home price in Nashville right now, according to Zillow.
Rates of 0.5% per year may not seem like much. Especially when you’re only investing a few thousand dollars a year. But are you willing to cost yourself the value of an entire home in a beautiful city just by investing in the wrong place?
Those are the hidden bets when it comes to choosing where to invest.
3 Investment Companies Clark Recommends
Aside from his intense love of Costco (and anything that helps people save money), Clark’s favorite investment firms are one of the biggest constants in many decades of his career.
He is a “boring” investor who declares himself proud. Ignore all the flashy marketing or hot new fintechs, says Clark. Go with Fidelity, Schwab or Vanguard.
He also recommends target date funds as “the easy button” to invest.
Here’s a quick guide to the different ways people invest and the typical cost of good options for each.
- Standard investment account (taxable): The purchase and sale of shares should be commission-free at this time. You can also find fee-free index funds with Fidelity Zero funds. Vanguard leads all companies in charging just 0.09% for their funds on average.
- Retirement account: Tax-advantaged accounts, such as a workplace 401(k) plan or IRA, are excellent tools to help you fund your retirement. Look for all-in costs of no more than 0.5%, says Clark—preferably much lower.
- Advisor robot: They are great for people investing out of a retirement account who are not comfortable managing their own investments and want an automatic harvest of tax losses. The typical robotic consultant on our list of the best charges 0.4% or less.
- Financial advisor: The more complex option, a good fiduciary financial advisor will charge about 1% of your assets under their management per year. Financial advisors are typically not for people who simply need advice on how to invest.
What is a paid trustee and why does it matter?
“Fiduciary” is one of those million dollar words that a lot of smart people don’t understand.
By definition, a trustee is someone with a legal responsibility to act in your best financial interest – and make the best decisions for you before making money for yourself.
You don’t want the person guiding your investment choices in a position to profit a lot by putting you on certain products that aren’t going to make you more money. This is exactly what many banks and insurance companies do with their investment arms, which are profit centers for their salespeople and executives.
It can be tricky to figure out who is and who is not a trustee. To make matters worse, there are two types of trustees: fee-based and fee-only.
A trustee only charges a percentage of the money you give them to invest. If you give them $100,000 and they charge you 1% per year, they will earn $1,000. They will no longer earn by advising you on certain investments. A “fee-based” trustee, if you can believe it, can sometimes make money from commissions as well as the fee they charge you.
You may not need a financial advisor. Here’s a guide to help you determine this. But regardless, be wary of anyone directing you to specific investments for a fee.
The big lesson here is simple: Clark says you should never invest through a bank or insurance company.
It’s okay to be a plain boring investor who clings to target date and index funds at Fidelity, Schwab or Vanguard.