COLUMBUS (TDB) -- An Ohio State University professor who studied Sweden's privatization of its public pension system found that investment companies advertised heavily and were able to fleece workers. They promoted investment programs that charged high fees and performed poorly. Professor Henrik Cronqvist examined mutual fund choices of 4.4 million Swedes who invested $5.6 billion in 2000, when the nation partially privatized its pension system.
"The results showed that firms that advertised generally charged higher fees than did other firms. Moreover, these firms did not seem to provide more services that would have made these higher fees worthwhile. Investors didn't get more value by paying higher fees. The bottom line is that choosing mutual funds based on advertising -- and as a result paying higher fees -- can be a costly mistake."
Cronqvist's research gives ammunition to those who doubt the wisdom of President George W. Bush's call for privatizing Social Security in the U.S. The OSU prof shows that unsophisticated investors subjected to a barrage of investment industry advertising can easily be separated from their savings. And privatization can boost the financial industry at the expense of workers.
The best proposals for SocSec investment accounts limit investors to 7-10 index (passive) funds (e.g., a money-market, bond, large cap income, large cap growth, medium cap, small cap, international, and perhaps a few others). The Swedish/British experience with dubious financial planners raking off excessive fees would not and could not be repeated.
ReplyDeleteWhether the financial services community would restrain itself from lobbying for the ability to sell "active" investments is an open question.
Bizyblog/Tom --
ReplyDeleteSee, you know this stuff better than most. When the Fed has an opening for a new governor I hope you get a call. Tom, I am really glad you weighed in on this. And when you are on the Fed, I know the economy will be in good hands. Giuliani, I see, knows you are around. Does he have your phone number? He might need a good economic advisor. Available?