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Welcome to the Whole-Hearted-Way newsletter. I hope you enjoy this information and the practical tips. Feel free to email me with any topics you would like to see covered or great resources you would like to share. You may subscribe or unsubscribe at the bottom. Enjoy!
Mutual Fund HistoryWhen I got into the financial planning business back in 1981, there were close to 5,000 mutual funds in the marketplace. At the end of 2006, there were over 8,726 to choose from as well as 359 ETFs (Exchange Traded Funds). It’s no wonder that people seek out help in choosing the right fund to invest in. It’s very confusing. Back in the 80s, you “sold” someone a mutual fund that you thought best for them. That fund usually had a sales charge of 5.25% that came off the top of the investment. The brokerage firm that I worked for would take 60% of that for themselves and I would get 40%. If I were a good little saleswoman (and I wasn’t), I could get up to 90% payout by recommending (selling) more funds –specifically funds that the broker dealer had approved. In addition, there were prizes and trips for people who sold the most of certain funds. Sounds unethical? Well, it still goes on today in most brokerage firms (Morgan Stanley, Merrill Lynch, etc) across America. It’s just gotten a little slicker. When investors starting to ask about no-load funds which are funds without a commission and very low expense ratios, independent investment advisors, like myself, started to crop up and take a percentage of assets under management fee to put together an asset allocation for a client, manage the money on a discretionary basis, and monitor it for the client. The broker dealer community thought it would never catch on but it did and was a successful model that is used today. They responded by putting together “Separate Management Accounts” (SMA) where they pooled investors money to invest in certain mutual funds that they paid certain managers to take care of. The downside is that the Independent Advisors were charging 1% of assets under management and the SMA accounts were as high as 3% of assets under management. After all not only the broker but the broker’s manager and the VP and everybody else needs a piece of the action. Unfortunately the public was duped into thinking a big name firm would come up with big service and big returns for that kind of money but SMAs have poor tax efficiency and mediocre returns since the person that sold you the account has no control over the allocation. Today the public is much more sensitive to fees and service and the broker-dealers are under pressure to lower their fees and come up with financial management accounts (hence the new Universal Management Accounts) where they make more money in their own best interests (since they are not considered fiduciaries by law). Only registered investment advisors can claim that. Then the “Index” fund came on the scene and people fed up with high expenses and the unscrupulous brokers, jumped on that bandwagon. John Bogle, the chairman of Vanguard was a very vocal consumer advocate and his firm led the way introducing the public to a large array of index funds. Index funds are funds that have extremely low expenses and have the same returns as the index that they track. For example, if the S&P 500 index is up 5.9% for the year and you own an S&P 500 Index mutual fund, you will get 5.9% minus the expenses of the fund which range from .18% to .25%. So why would you even need a manager now? Or how can you do it yourself? Diversify your indexes! Because the indexes are skewed to a certain capitalization (cap) and economic sector (such as technology, or healthcare), you need to watch for diversification. The S&P 500 index comprises over 70% of the market cap of all stocks traded in the US and contains over 100 sectors. But that means that most of the value is in the largest firms traded. Perhaps you would like more exposure to small cap companies which are fast growing? Well, then you would need to invest in a small cap index such as the Russell 2000 Index. Anyone with a portfolio of under $500,000 and a little help can come up with a portfolio of low cost, diversified index mutual funds that would suit their needs. If you have a bigger portfolio than that, you can afford and should seek the help of a professional investment advisor that can do more complex asset allocation for you. Because of all the spam filters, I need you to formally subscribe. So click on the subscribe link below and I will send you a free PDF file called -Choosing the Right Investment Benchmarks. Your feedback is always welcome and appreciated! Write to me at fern@wholeheartedway.com. <><><><><><><><><><><><><><><><><><><><><><><><><><><><> June 2007-- this column is produced by Whole-Hearted-Way and
provided by Fern Alix LaRocca CFP® EA
fern@wholeheartedway.com |
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