Some Alternatives to Big Banks and Their Record-High Fees

Some Alternatives to Big Banks and Their Record-High Fees

By: Tim Maurer Fees are at an all-time high at the nation’s big banks, while the interest they pay is at an all-time low. Worse yet, evidence recently has come to light of the criminal abuse of a practice common among large banks since the fall of Glass-Steagall: cross-selling. Cross-selling is rooted in consumer research that large financial institutions tend to salivate over. It shows that customers are more profitable for longer when they own more products. How else could they get us to settle for deposit products for which we pay them? Does this absurdity leave you, the bank customer, wanting to bolt from the big banks? Fortunately, you have alternatives. Here are some options: 1. Flee the big brick-and-mortar bank for its younger virtual sibling: the online bank. Online banks, which lack the overhead of their more traditional rivals, can offer higher interest rates, lower fees, free ATM withdrawals and low or no minimum-balance requirements. And they do. I’ve been using an online bank for several years now and haven’t paid a single ATM fee for that entire time — and I can go to any ATM in the known universe (seriously). In the past year alone, I’ve received more than $200 in ATM fee rebates. I recommend that you choose an online bank that best serves your needs and lifestyle. Mine, for example, offers unlimited ATM reimbursement, but others will cap the reimbursement amount or restrict you to a (typically large) number of “free” ATMs. Those banks, however, may pay a higher level of interest than my bank. NerdWallet did an excellent job summarizing the best...
The Dangerous Educational Gap

The Dangerous Educational Gap

By: Larry Swedroe A large body of research on the behavior of individual investors has demonstrated that low levels of financial knowledge, in addition to biases in the selection and processing of information, drive suboptimal financial choices. Among the findings from the literature are: Men tend to be more financially literate than women, independent of country of residence, marital status, educational level, age, income and their possible role as decision-makers. Women tend to be less confident than men, though they are more aware of their own limits. This is a positive finding, because overconfidence, which may lead to excessive risk taking, excessive trading and lack of diversification, is negatively related to performance. The result is that women outperform men. Note that it has been found that higher levels of education may lead to higher levels of overconfidence. (Any financial advisor who has worked with doctors would confirm this!) Degree of financial knowledge tends to be positively correlated with education and wealth. Individuals with a high degree of financial literacy tend to exhibit a higher risk tolerance and a higher degree of patience, as well as greater willingness to spend time acquiring financial knowledge. Financial experience, as measured through the ownership of financial instruments and the holding period length of risky assets, is positively associated with financial knowledge. Regret aversion (coupled with low literacy) may deter the demand for professional help if individuals anticipate the possibility that advisors will highlight mistakes in their previous decisions. Monica Gentile, Nadia Linciano and Paola Soccorso contribute to the literature on investor education and behavior with their March 2016 working paper, “Financial Advice Seeking,...
Do Upside and Downside Capture Ratios Predict Mutual Fund Performance?

Do Upside and Downside Capture Ratios Predict Mutual Fund Performance?

By: Larry Swedroe The importance of actively managed mutual funds in the financial sector has led to substantial research focused on their performance. The overwhelming evidence is that it’s very difficult, if not impossible, to identify ahead of time the shrinking percentage of active managers who will outperform in the future. Among the reasons for the difficult nature of this task is that so few managers succeed, and that it’s difficult to separate skill from luck. Consider the findings from an August 2016 research paper, “Mutual Fund Performance through a Five-Factor Lens,” by Philipp Meyer-Brauns of Dimensional Fund Advisors (DFA). His sample contained 3,870 active mutual funds over the 32-year period from 1984 to 2015. Benchmarking the active funds’ returns against the new Fama-French five-factor model (which adds profitability and investment to beta, size and value), Meyer-Brauns found an average negative monthly alpha of -0.06 % (with a t-statistic, a measure of statistical significance, of 2.3). He also found that about 2.4 % of the active funds had alpha t-statistics of 2 or greater, which is slightly less than what we would expect from chance (2.9 %). He concluded: “There is strong evidence that the vast majority of active managers are unable to produce excess returns that cover their costs.” He added that “funds do about as well as would be expected from extremely lucky funds in a zero-alpha world. This means that ex-ante, investors could not have expected any outperformance from these top performers.” Meyer-Brauns’ findings are consistent with the overwhelming evidence that, when it comes to active managers, past performance is not predictive of future results. For...
You Won’t Get Fooled Again: Understanding the Availability Bias in Investing

You Won’t Get Fooled Again: Understanding the Availability Bias in Investing

By: Tim Maurer You’re no fool. But let’s imagine for a second that a major public figure said something—something false—over and over (and over) again. Regardless of its questionable veracity, is there a chance you’d be more likely to believe the proclamation simply because you’ve heard it often and recently? Like it or not, the answer is an emphatic “Yes.” You and I are more likely to believe something is true when it’s readilyavailable—that is, when we’ve heard it frequently and, especially, when we’ve heard it lately. This phenomenon is dubbed the “availability heuristic,” and even though it was discovered and named (by Amos Tversky and Daniel Kahneman) more than 40 years ago, it likely hasn’t caught on in the broader public awareness because its title includes the word “heuristic.” Nonetheless, the availability heuristic’s power to persuade is not lost on marketers, salespeople, lobbyists and politicians. They use it on us all the time. But let’s explore the errant biases in investing, in particular, that while readily available often lead to sub-optimal outcomes. Active vs. Passive The debate rages (and no doubt will continue to do so) over whether active stock pickers are able to beat their respective benchmark indices. The implications seem simple: If fee-charging money managers aren’t persistently outperforming their benchmarks, we likely should not be paying them for underperformance, right? If you knew, for example, that nine out of 10 active managers failed to beat their benchmarks over the short and long term, would you be likely to put your money at risk trying to find the one that might add value by capturing that elusive...
Investing in Consumer Loans Comes More into Focus

Investing in Consumer Loans Comes More into Focus

By: Larry Swedroe Online peer-to-peer (P2P) lending is emerging as a provider of credit to individuals as well as small businesses, with the potential to benefit borrowers (by reducing the high cost of bank credit, credit card debt and payday loans) and lenders (by providing opportunities to earn higher yields). A significant hurdle for investors, however, is the information asymmetry between the borrower and the lender. The lender does not know the borrower’s credibility as well as the reverse. Such information asymmetry can result in adverse selection. Financial intermediaries have begun to replace individuals as the lenders, buying loans from originators such as the Lending Club, Prosper, Square and SoFi, and creating investment products such as closed-end “interval” funds that individual investors can use to access the market. These funds are not mutual funds, because they don’t provide daily liquidity. Instead, they provide for redemptions (with limits) at regular intervals (such as quarterly). Reducing Asymmetric Information Risk This type of financial intermediary can help reduce the asymmetric information risk by setting strong credit standards (such as requiring a high FICO score), performing extensive due diligence on the originators (to make sure their credit culture is strong), structuring repayments in ways that can improve performance (such as requiring that all loans be fully amortizing and that automatic ACH repayments are made, thereby eliminating the choice of which loans to pay off, as with credit card debt), and requiring the originator to buy back all loans that are shown to be fraudulent. Additionally, they can enhance credit quality by requiring the use of social media to confirm information on the credit...
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