It’s especially true in the modern era of investing. You no longer need a broker to buy and sell stock. You can even do it in real time, for free, straight from your phone.
The competition for your business is fierce. There are more investment options than ever. 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 grab bag of Jelly Belly candy, you know not all options are good. (Peach and cherry are much better jelly bean 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 for investing.
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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 their penchant for "papercutting their customers to death" with small fees, their "customer no-service" — or lately, their use of Zelle — Clark constantly airs grievances against these institutions.
On a recent podcast, Clark mimicked Elon Musk in saying that if he ever gets mysteriously taken out, you know who to blame: the banks. That's because Clark said banks are Enemy No. 1 when it comes to investing.
“You never, never, never — not ever — invest with a bank,” Clark says.
“You think Jesse James knew how to take money from banks? Let me tell you how the banks will take from you if you do a retirement account or HSA with them. They’re not where you go unless you’re just feeling really charitable and you want to have less money.”
And according to Clark, "Where else should you never go? An insurance company."
Clark often recounts investments gone bad that involve 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," Clark says. "Because it's not as bad as doing one of these things directly with a bank. It's just almost as bad."
So there you have it. According to Clark, you should never invest with 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 getting a late start saving for retirement.
If I just double the amount of money per month, the person asked, will I build up $1 million in half the time?
Unfortunately not, as Clark pointed out. The most powerful force in finance is compound interest. Often what matters the most is how long you can allow your money to compound on itself.
Outside of time, the other major variable is your annual return. Over many decades, investing in the S&P 500 is going to provide a better return than long-term bonds.
Most people focus on what to invest in rather than where to invest. But the same investment at two different companies can make a difference of tens of thousands or even hundreds of thousands of dollars for the typical retirement nest egg.
Let’s take a look at how much money a small difference in fees can make over a long time period. We assumed a starting 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: $1,526.86 Balance: $256,271.56 | Fees: $9,695.37 Balance: $778,258.02 | Fees: $37,752.12 Balance: $1,898,062.47 | Fees: $120,616.45 Balance: $4,293,344.37 |
| 0.25% | Fees: $3,799.28 Balance: $252,472.28 | Fees: $23,993.78 Balance: $763,959.61 | Fees: $92,889.20 Balance: $1,842,925.39 | Fees: $294,992.44 Balance: $4,118,968.38 |
| 0.5% | Fees: $7,539.46 Balance: $248,732.10 | Fees: $47,186.89 Balance: $740,766.50 | Fees: $180,949.67 Balance: $1,754,864.92 | Fees: $569,007.05 Balance: $3,844,953.77 |
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Results: Fees Can Make a Shockingly Big Impact
In this scenario, in 40 years, the difference between 0.1% and 0.5% annual fees amounts to $448,390.60. That's a little more money than the average home price in Nashville right now, according to Zillow.
Fees of 0.5% per year may not seem like much. Especially when you’re just investing a few thousand dollars a year. But are you willing to cost yourself the value of an entire house in a nice city just by investing in the wrong place?
Those are the hidden stakes when it comes to choosing where to invest.
3 Investment Companies Clark Recommends
Other than his intense love of Costco (and anything that helps people save money), Clark's favorite investment companies are one of the biggest constants across many decades of his career.
He's a self-professed, proud "boring" investor. Ignore all the glitzy marketing or trendy new fintech companies, Clark says. Go with Fidelity, Schwab or Vanguard.
He also recommends target date funds as "the easy button" of investing.
Here’s a quick guide to the different ways people invest and the typical cost of the good options for each.
- Standard (taxable) investment account: Buying and selling stocks should be commission-free at this point. You can also find fee-free index funds with the 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 terrific tools to help you fund your retirement. Look for all-in costs of no higher than 0.5%, Clark says — preferably much lower.
- Robo-advisor: These are great for people investing outside of a retirement account who aren't comfortable managing their own investments and want some automatic tax-loss harvesting. The typical robo-advisor from our list of the best ones charges 0.4% or less.
- Financial advisor: The most complex option, a good fee-only fiduciary financial advisor will charge about 1% of your assets under their management per year. Financial advisors aren't typically for people who simply need guidance on how to invest.
What’s a Fee-Only Fiduciary and Why Does It Matter?
“Fiduciary” is one of those million-dollar words that lots of smart people don’t understand.
By definition, a fiduciary is someone with a legal responsibility to act in your best financial interest — and to put making the best decisions for you ahead of making money for themselves.
You don’t want the person guiding your investment choices in a position to profit big-time by putting you into certain products that aren’t going to make you the most money. That’s exactly what a lot of banks and insurance companies do with their investment arms, which are profit centers for their salespeople and executives.
It can get complicated to figure out who is and isn’t a fiduciary. Making matters worse, there are two types of fiduciaries: fee-based and fee-only.
A fee-only fiduciary charges you a percentage of the money you give them to invest. If you give them $100,000 and they charge 1% a year, they’ll make $1,000. They won’t make more by guiding you into certain investments. A “fee-based” fiduciary, if you can believe it, can sometimes make money from commissions as well as from the fee they charge you.
You may not need a financial advisor at all. Here's a guide to help you determine that. But regardless, be wary of anyone steering you into specific investments for a fee.
Final Thoughts
The big takeaway here is simple: Clark says you should never invest through a bank or an insurance company.
It’s OK to be a simple, boring investor who sticks to target date and index funds at Fidelity, Schwab or Vanguard.
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