MONEY Investing

Kickstarter Backers Are Investors, and It’s Time They Got Used To It

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Many Kickstarter users still don't quite understand what they're getting into, or why the site is predicated on risk.

It’s been a rough September for Kickstarter. After a three-week period during which two major projects—each of which had raised more than $500,000 on the site—failed spectacularly, the crowdfunding platform has begun to look a little less like a harmless way for underdog visionaries to fund their passion projects and a little more like a casino. It hasn’t helped that a handful of Kickstarter scams and con men were exposed in recent months.

Recently, Kickstarter appeared to respond to the bad press by revising its terms of service. The new document does a better job of laying out the responsibilities creators have to their backers. No scamming, do your best, try to make it up to people if you fail, and so on. But that move likely won’t fix the deeper problem: That most of the site’s users believe that their donations entitle them to some kind of tangible reward, be it a smart watch or a bamboo beer koozie. In reality, nothing of the sort is guaranteed. That’s because Kickstarter backers aren’t customers making a purchase. They’re investors. And like all investments, Kickstarter projects have a chance of going bust.

To an extent, the confusion is understandable. Kickstarter calls itself “a new way to fund creative projects,” which sounds a lot more innocuous than “Craig’s List for angel investing” — even though the latter may be closer to the truth. Backers generally have limited information about the people they are supporting. And once a project is funded, they’re on their own when it comes to enforcing contracts with a creators — to the extent that such contracts even exist. In the event that a scammer takes everyone’s money and runs, Kickstarter won’t offer a refund or even chip in for legal fees. But at least in those cases there’s a clear basis for taking legal action (fraud); when money is squandered in a more conventional way — through bad business decisions — funders have no recourse at all.

However, before anyone deletes their Kickstarter app or swears off crowdfunding for good, it’s worth pointing out that you may have staked your retirement on a similar system: The stock market. Equity ownership, after all, comes with startlingly few guarantees. If Tim Cook decides tomorrow to spend all of Apple’s capital on a strategic Cheetos reserve, there’s really not much the average investor (without a controlling stake in the company) can do about it other than sell off the stock. Sure, the stock market does have additional important protections: greater transparency; legally empowered and (theoretically) independent boards of directors; dedicated regulators and watchdogs, and more. But in both cases investors take on a large amount of risk.

Does that make Kickstarter a bad deal? Not at all. In fact, the risky nature of Kickstarter is arguably the very thing that makes it worth using. Project creators offer something to backers — even if it’s just early access to their product — as a reward for taking a chance on a risky idea.

But it’s important to remember why the maker of that sweet felt iPhone case is giving you priority treatment: Things could all go south. And if they do, you’re the one who’ll take the hit.

MONEY Impact Investing

How to Change the World—and Make Some Money Too

Young adults flock to investments that promote social good. This was a hot topic at a big ideas festival over the weekend and is front and center with financial firms.

Social investing has come of age, driven by a new generation that is redefining the notion of acceptable returns. These new investors still want to make money, of course. But they are also insisting on measurable social good.

Millennials make up a big portion of this new breed, and their influence will only grow as they age and accumulate wealth. The total market for social investments is now around $500 billion and growing at 20% a year. As millennials’ earning power grows and they inherit $30 trillion over the next 30 years, investing for social good stands to attract trillions more.

So what began in the 1980s as a passive movement to avoid the stocks of companies that sell things like tobacco and firearms has broadened into what is known as impact investing, a proactive campaign to funnel money into green technologies and social endeavors that produce measurable good. Clean energy and climate change are popular issues. But so is, say, reducing the recidivist rate of lawbreakers leaving prison.

Impact investing was a hot topic this weekend at The Nantucket Project, an annual ideas festival that aims to change the world. Jackie VanderBrug, an analyst at U.S. Trust, noted that 79% of millennials would be willing to take higher risks with their portfolio if they knew it would drive positive social change. Based on data from Merrill Lynch, that compares to about half of boomers with a social investing screen and even fewer of the oldest generation. VanderBrug also noted that women of all ages, an increasing economic force, tend to favor these strategies.

Speaking at the conference, Randy Komisar, a partner at the venture capital powerhouse Kleiner Perkins Caufield Byers and author of The Monk and the Riddle, said, “This generation is the most different of any since the 1960s.” He believes millennials are chipping away at previous generations’ affinity for growth and profits at any cost. Young people embrace the idea that you work not just for money but also for experience, satisfaction and joy.

Komisar noted the rise of B corporations like Patagonia and Ben and Jerry’s. These are for-profit enterprises that number 1,115 in 35 countries and 121 industries. Since 2007, the nonprofit B Lab has been certifying the formal mission of companies like these to place environment, community and employees on equal footing with profits. There are many more uncertified “Benefit” corporations. Since 2010, 41 states have passed or begun working on legislation giving socially conscious Benefit corporations special standing. Legally, they are held to a higher standard of community good, but they have cover from certain types of shareholder lawsuits.

Both types of B corporations acknowledge that their social mission gives them an important advantage hiring young adults, who in surveys show they place especially high value on the chance to make a social impact through work. “If your company offers something that’s more purposeful than just a job, younger generations are going to choose that every time,” Blake Jones, chief executive of Namasté Solar, a Boulder, Colo., solar-technology installer and B Corp. told The Wall Street Journal.

Industries that do not address the wider concerns of millennials will increasingly become marginalized. The financial analyst Meredith Whitney, who rose to prominence calling the subprime mortgage disaster, told the gathering in Nantucket that financial services firms have been among the slowest to consider sustainability issues—“and that’s why I think they are in trouble.”

Yet banks may be starting to come along. Bank of America clients have about $8 billion invested along sustainability lines, the bank says. And its Merrill Lynch arm has been a leading explorer of “green” bonds, which raise money for specific causes and pay investors a rate of return based on whether the funded programs hit certain measures of achievement.

Late last year, Merrill raised $13.5 million for New York State and Social Finance for a program to help formerly incarcerated individuals adjust to life outside prison. How well the bonds perform depends on employment and recidivism rates and other measures taken over five and a half years. The firm is now looking into a similar bond issue to fund programs for returning war veterans.

For now, green bonds are aimed at institutional investors, especially those charitable foundations willing to risk losses in their effort to change the world. The J.P.Morgan 2014 Impact Investor Survey found that about half of institutions investing this way are okay with below-average returns.

Young people saving for retirement and faced with a crumbling pension system can’t really afford the tradeoff, at least not on a large scale. That’s partly why they want their job or company to have a higher purpose. But ultimately some version of green bonds, perhaps with a more certain return, will be open to individuals for the simple reason that four out of five young adults want it that way.

MONEY Ask the Expert

When You Do—and Don’t—Need a Pro to Manage Your Money

Investing illustration
Robert A. Di Ieso Jr.

Q: “At what net worth should I consider getting a money manager?”

A: There is no magic number for when you need help. Similarly, you don’t have to wait for your net worth to hit a certain mark to seek out the services of a pro.

“As soon as you have enough money that it’s keeping you up at night wondering what to do, then that may be when you need to find some help,” says Deena Katz, a certified financial adviser and associate professor of personal financial planning at Texas Tech University. “But that number will be different for everyone. Some people will feel it at $100,000, others at a million.”

Determining whether you need a money manager basically boils down to the questions you have about your money and whether you’re able to find the answers yourself and then follow through.

If your financial situation is complex—say you also manage your small business—or if you simply don’t have the time to dedicate to understanding and managing your own investments, paying an adviser to help you look after your funds could be worthwhile, says Christine Benz, director of personal finance at Morningstar.

You may also want to get investment help if you’re paralyzed by fear or know you’re prone to chasing hot funds, panic selling, or overreacting to market swings. A pro can act as a coach and help you keep your emotions in check, says Benz.

On-going money management can be costly, though. You’ll typically pay an annual fee equal to 1% to 1.5% of your total assets under management. And many wealth advisers won’t take on you as a client unless you have a minimum amount of money to invest, typically a quarter to half a million dollars.

Help just when you need it

Luckily, you probably don’t need investment guidance on a continual basis. Most of us are fine DIY-ing it the majority of the time—using simple online asset allocation tools such as Bankrate’s and sticking with broadly diversified stock and bond index funds—and getting an expert second opinion only when we’re getting started or making a big change.

In that case, you can find a financial planner who charges by the hour or per project. “If you do need more long-term help than these advisers are likely to be able to provide, in my experience they’ve always been quick to refer clients to money managers who can,” says Benz. “It’s a good first step to getting a read on how much help you may need.”

For help finding an adviser who charges an hourly or project-based rate, search the Financial Planning Association website or the Garrett Planning Network’s website.

Help that won’t cost you much

If you don’t want to go it alone but want some investment guidance, you have several options, even if you don’t have a big portfolio. One is to keep your money in a low-cost target-date retirement fund, where the manager will adjust your investment mix based on the retirement date you select.

For a more tailored approach, another low-cost route is a “robo-adviser,” says Sheryl Garrett, a certified financial planner and founder of the Garrett Planning Network. Companies like Wealthfront and Betterment offer portfolio advice that’s somewhat personalized via the web and apps. The firms use software to come up with a stock and bond mix based on your investing goal and time horizon. They then put you into low-cost ETFs and rebalance regularly. Annual fees typically run from 0.15% to 0.35% of assets, on top of ETF charges.

Finally, Vanguard has a pilot program called Personal Advisor Services, which charges 0.3% of assets a year for investment management. You must have $100,000 in Vanguard accounts to qualify; the fund company plans to drop that minimum to $50,000 in the near future.

MONEY portfolio strategy

Why Rats, Cats, and Monkeys are Smarter than Investors

Ms. Kleinworth goes short in the Treasury Bond market.
Ms. Kleinworth goes short in the Treasury Bond market. Nora Friedel—RatTraders.com

A performance artist in Austria piles on to the case against "active management" by finding yet another animal that seems to invest better than humans.

An Austrian performance artist claims to be breeding and training rats to be able to beat the investment returns of highly educated and paid professional investors.

The artist, Michael Marcovici, says he trained the rodents to trade in foreign exchange and commodities. He did so by converting market information into sounds and rewarded the rats with food when they predicted price movements correctly and inflicted a small electric shock when they didn’t. (If only hedge fund managers could be compensated in similar fashion.) The rats are placed in a Skinner Box with a speaker, red and green lights, a food dispenser and an electrical floor to deliver the shock.

Marcovici says rats can be trained in three months, are able to learn any segment of the market and “outperform most human traders.” This may seem like an outlandish claim, but this kind of thing isn’t altogether new.

UK’s The Observer held a challenge in 2012 between a “a ginger feline called Orlando,” a pack of schoolchildren and a few wealth and fund managers to see which could produce the biggest returns over the course of the year.

The cat won.

Long before Orlando’s victory, Princeton economist Burton Malkiel wrote that “a blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts,” in his book “A Random Walk Down Wall Street.”

Add this to the overwhelming evidence that largely unmanaged index funds — that simply buy and hold all the securities in a market — often outperform professional stock pickers.

Just this month S&P Dow Jones Indices Versus Active funds scorecard for the first six months of the year, which showed that 60% of actively managed domestic large cap funds underperformed their benchmarks.

That’s in addition to 58% of domestic mid-cap and 73% of small cap funds losing out. If you extend the record out five years, more than “70% of domestic equity managers across all capitalization and style categories failed to deliver higher returns than their respective benchmarks.”

What does this mean for your portfolio? As Morningstar.com’s John Rekenthaler noted in a recent article, active funds may not have much of a future.

Passively managed mutual funds and exchange-traded funds, Rekenthaler points out, enjoyed 68% of the net sales for U.S. ETFs and mutual funds over the past year. That leaves 32% for active funds. Meanwhile, target-date funds account for $30 billion of the $134 billion in inflows for active funds over the past 12 months. Even on this front, passive target date funds sales are growing.

In fact, the only real growth area for actively managed funds are in so-called alternatives that invest in things like currencies and that charge annual fees of close to 2% of assets. That’s a lot of cheese.

You’re generally better off staying clear of professional security pickers.

No, this doesn’t mean you should find a rat, cat, or monkey to manage your 401(k). Instead, go the passive index route and select three basic building block funds from our MONEY 50 selection (like say Vanguard Total Bond Market Index, Schwab Total Stock Market Index and Vanguard Total International Stock Index) and you can achieve basic diversification at a price that won’t make you as poor as a church mouse.

MONEY Investing

Why We Feel So Good About the Markets—and So Bad—at the Same Time

Investor and retirement optimism is at a seven-year high. Yet most people believe their personal income has topped out. What gives?

Investors are feeling better about the markets than at any time since the financial crisis, a new poll shows. But most also believe they have topped out in terms of earning power, and that the Great Recession continues to weigh on their finances.

Buoyed by stronger GDP growth, record high stock prices, and a falling unemployment rate, investors in the third quarter pushed the Wells Fargo/Gallup Investor and Retirement Optimism index to its highest mark since December 2007. Yet 56% of workers expect only inflation-rate pay raises the rest of their career, and half believe they are destined to end up living on Social Security benefits.

“At the macro level, people are feeling pretty good,” says Karen Wimbish, director of Retail Retirement at Wells Fargo. “But at the personal level, the Great Recession left a deeper wound than a lot of us realize.” The average worker believes that wage growth, which has been stagnant for decades, won’t rebound before they retire. This feeling is especially acute among the upper middle class, those making more than $100,000 a year.

The gloom is partly attributable to the national discussion about wage inequality and some evidence that only the top 1% is getting ahead. It may also reflect a sense that the U.S. is losing ground to the faster growing developing world and experiencing an inevitable relative decline in standard of living.

The Federal Reserve has been battling anemic growth for seven years through an aggressive stimulus program that includes rock-bottom short-term interest rates. This week, the two Fed governors most outspoken and critical of this policy confirmed that they would retire next year, essentially putting the Fed all-in on a growth and jobs agenda with diminishing concern over inflation and underscoring the sense of stagnation so many feel.

Most investors polled (58%) said they are doing about as well or worse than five years ago. Similarly, 63% said they are saving about the same or less than five years ago. These figures are essentially unchanged from two years ago, suggesting that investors have not made much financial headway in the recovery. Roughly half said they are still feeling the effects of the recession.

“Is it real?” Wimbish says. “Or is it emotional?” If our prospects are really so dire, how do you explain record high stock prices, strong quarterly growth, a pickup in consumer borrowing, and an improving jobs picture?

Whatever is causing the gloom, one result is that nearly a third of investors continue to shun the stock market. Those with less than $100,000 in assets avoid stocks at twice the rate as those with more than that level of savings. Arguably, those with fewer assets are precisely the ones who need to be in stocks to take advantage of their superior long-run gains and build a nest egg.

They may be worried that they have missed the rally and that it is too late to get in. But the overriding concern—expressed by 60%—is that stocks are just too risky. So as the average stock has more than doubled from the bottom and recovered all its losses, and as those who remained true to their 401(k) contribution plan through thick and thin have become flush with gains, the truly risk averse have lost valuable time. Seeing this now may be part of what makes them so glum.

MONEY financial advice

Why Won’t Advisers Disclose Their Investment Performance?

Prospective clients want to know how good a financial adviser is at investing, but information about returns can be incomplete and misleading.

Some financial advisers don’t mind sharing information about the performance returns they have pulled in for clients. Those numbers, nonetheless, may come with a caveat.

Clients of Jim Winkelmann, an adviser in St. Louis, Mo., can request a free performance report through his website. It lists details about six model portfolios including their ten-year annual returns, and year-to-date returns.

But a warning in bold, red letters reminds clients that little to nothing can be learned from past performance. “Do not base decisions on this information,” it says.

Winkelmann, who oversees $130 million in assets, is among a minority of advisers who share their investment track records. Yet some financial services professionals believe the practice should be more common because it can help prospective clients determine if an adviser will do a good job.

Some advisers, nonetheless, say they are skittish because of a maze of rules and guidance from the Securities and Exchange Commission and state regulators that make advertising tricky. The Financial Industry Regulatory Authority, Wall Street’s industry-funded watchdog, also warns on its website against advisers boasting “above-average account performance.”

Regulators typically prefer, but do not require, that advisers who advertise returns follow the Global Investment Performance Standards, the king of performance guidelines, say securities industry experts. This set of principles helps advisers calculate and report results. The group that developed the GIPS standards also recommends that advisers hire a reputable, independent firm to verify those figures.

While using GIPS is optional, advisers who do not use it may soon be at a disadvantage because it will be harder to distinguish themselves from competitors, said Michael Kitces, an adviser in Washington and industry blogger.

But the steep price tag — roughly $5,000 to $10,000 to put a system in place and hire staff — is keeping some advisers away, Kitces said.

Instead some advisers use their own calculations. But those can mislead investors or land advisers in hot water with regulators. Some advisers, for example, may showcase only the years of their best results.

Clashing Viewpoints

Many advisers avoid performance advertising, but not because of the rules or GIPS expenses. Rather, they do not believe the figures are an accurate reflection of their client portfolios. That is especially true of advisers who offer financial planning services and who must often work with some assets clients already have, said John Clair, an adviser in Midlothian, Va.

Some types of assets that advisers can get stuck with include retirement plans that offer poor fund choices or mediocre employer stock the client wants to keep, Clair said. Those investments can skew returns, which would make them of little value to potential clients, Clair said.

Other factors that can also sway performance returns include the wide range of investment goals and risk tolerances among advisers’ clients, said Dave O’Brien, another adviser in Midlothian.

What’s more, overall performance numbers alone do not explain two important strategies that may be boosting returns: an adviser’s ability to reduce tax and transactions costs, O’Brien said.

Clair and O’Brien both have software that lets clients track real-time performance of their individual portfolios. But advertising historical track records is more suited to hawking a product, such as a mutual fund, instead of comprehensive advice, said O’Brien.

“We’re providing a service that’s unique to each client,” O’Brien said. To the layman they may seem the same, but they’re not.”

MONEY stocks

Fossil-Free Investing Heats Up

As concerns about climate change grow, some colleges, foundations, and investors are moving their money out of coal and oil stocks.

MONEY financial advisers

Help! How Do I Break Up With My Financial Adviser?

Here's your chance to give your financial advice in the pages of MONEY magazine.

Did you ever want to be a personal-finance advice columnist? Well, here’s your chance.

In MONEY’s “Readers to the Rescue” department, we publish questions from readers seeking help with sticky financial situations, along with advice from other readers on how to solve those problems. Here’s our latest reader question:

We feel guilty about it, but we’d like to replace the financial adviser we’ve had for 30 years. How do we tell him and do this with the least anguish?

What advice would you give? Fill out the form below and tell us about it. We’ll publish selected reader advice in an upcoming issue. (Your answer may be edited for length and clarity.)

Please include your contact information so we can get in touch; if we use your advice in the magazine, we’d like to check with you first, and possibly run your picture as well.

Thank you!

To submit your own question for “Readers to the Rescue,” send an email to social@moneymail.com.

To be notified of future “Readers to the Rescue” questions and answers, find MONEY on Facebook or follow MONEY on Twitter.

TIME Investing

The Triumph of Index Funds

CalPERS’ move is a vote for passive investing

It would be reasonable to assume that the professionals running CalPERS, the California pension fund with $300 billion in assets, would be good at picking stocks. Or at least reasonably good at picking other smart people to pick stocks for them. But in the past year, CalPERS has made two decisions that are telling for all investors when it comes to trying to outperform the market.

Late last year, the pension fund signaled its intention to move more assets from active management into passively managed index funds. These are funds in which you buy a market, such as the S&P 500 or the Russell 2000, unlike mutual funds that try to select winners within a given class of equities. More recently, CalPERS said it would also pull out the $4 billion it has invested in hedge funds. Although hedge-fund honchos make headlines with their personal wealth, the industry has significantly lagged the market in the past three years. “Call it capitulation or sobriety: it’s saying that we can’t beat the market and we can’t find managers who can beat the market, and even if they can, their fee structures are overwhelming,” says Mitch Tuchman, CEO of Rebalance IRA, an investment adviser focused on index-fund-only portfolios.

The CalPERS move is a nod to University of Chicago economist Eugene Fama, who won a Nobel for his lifelong work on “efficient markets.” That theory says that because stock prices reflect all available information at any moment–they are informationally “efficient”–future prices are unpredictable, so trying to beat the market is useless. According to the SPIVA (S&P Indices Versus Active) Scorecard, the return on the S&P 500 beat 87% of active managers in domestic large-cap equity funds over the past five years.

Why can’t expert money managers succeed? Researchers from the University of Chicago say there are so many smart managers that they offset one another, gaining or losing at others’ expense and winding up near the market average, before expenses. “Unless you have some really special information about a manager, there’s really no good reason to put your money in actively managed mutual funds,” says Juhani Linnainmaa, associate professor of finance at Chicago’s Booth School of Business. He says the median managed fund produces an average –1% alpha–that is, below the expected return. Some funds do beat their index–what’s not clear is why. “What is the luck factor?” he asks. “Given the noise in the market, it’s kind of hopeless to try to figure anything out of this.” Linnainmaa’s colleague, finance professor Lubos Pastor, also found that mutual funds have decreasing returns to scale. Size hurts a manager’s ability to trade.

Yet even if managers match the market, they’ve got expense ratios that then eat into returns. Index-fund proponents like John Bogle at Vanguard have long preached that fees dilute performance. A 1% difference can be huge. “It’s not 1% of all your money,” says Tuchman, “it’s 1% of expected returns: that’s 16% to 20%.” The average balance in Fidelity 401(k) plans was $89,300 in 2013. While 1% of that is $893, if you earned 8% compounded over 10 years, your balance would be $192,792; at 7% it’s $175,667, a difference of $17,125. Real money, in other words.

Investors are getting the message, pouring some $345 billion into passive mutual and exchange-traded funds over the past 12 months vs. $126 billion in active funds, says Morningstar. “At the end of the day,” says Tuchman, “an index fund is run by a computer, a robot. We don’t want to believe that a robot can beat Ivy League M.B.A.s–and I’m one of them.” What CalPERS seems to be saying is that the game is over. The robot wins.

MONEY 401(k)s

How Do I Choose Investments for My 401(k)?

What's the the right mix of stocks and bonds for your retirement account? Financial planners explain.

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