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|"You can pay it now or you can pay it later." "A no-load fund is
really more expensive than a loaded fund." "I won't charge you a commission on
this fund." "If you buy it on the offering you can get in with no
There they are, a few of the lines you are likely to hear when you talk with your broker. When they can't think of a good reason for you to buy a particular product from them, they resort to the only thing they can think of: fibs, lies, and half truths. A good, honest broker or financial planner would try to get you to buy a particular product based on honest performance comparisons, or because of the tremendous service you will receive. Most, however, can't really give you either one, so they resort to little lies that could cost you big.
Let's take a closer look at some of these little lies and lay them to rest. If ever you hear one of these from your broker or a potential planner, thank them very much for their time, then turn around and leave. A relationship with a broker, like any important relationship, must be based on trust.
"You can pay it now or you can pay it later." Ah, here's a good one. The planner is implying that the load (commission, sales charge) is somehow used to pay for the management of the mutual fund. So, the argument goes, if you don't pay it up front you'll pay it a bit at a time over the years. Wrong. The sales charge does not go to the fund, it pays the person who sold it to you, period. If you invest in a good no-load fund, you will, in fact, eliminate the middle-man and buy direct from the source. It's like buying wholesale.
The people who are telling you it's cheaper to pay the load up front are hoping you will confuse a true no-load fund with another broker-sold product; the no-front-load fund. These are funds that generally have a deferred sales charge. If you withdraw from the fund in the first 5 to 7 years you get socked for the commission going out, plus these funds usually impose a hefty 12b-1 fee every year. The 12b-1 is put into a pool to pay a commission to the salespeople. It is charged in addition to the regular management fee and can increase the total fees, taken from your account every year, to 2% or more. A typical no-load (while some may charge a small 12b-1 fee) generally charges about 1% against your account annually and charges you nothing to get in.
"A no-load fund is really more expensive than a loaded fund." Again, this argument only works when you compare two different broker-sold products: the front-load fund and the contingent deferred sales charge product. So this stone is only effective when thrown at another broker or planner, not when tossed at a real no-load product. "A no-load fund is rarely more expensive than a loaded fund" would be a more accurate statement. If they were perfectly honest they would have to say: "A no-load fund is usually less expensive than a loaded fund." "I won't charge you a commission on this fund." Right, and I may have already won 10 million dollars in the Publishers Clearinghouse Sweepstakes.
They just love their job, they don't care if they get paid, they're in it for the personal satisfaction. This is probably one of the most insidious lies a broker can tell. Very few brokers get a salary, they work on commission and you always pay that commission. Only if you remove the broker, or the brokerage firm from the transaction can you avoid paying a commission.
Brokers and financial planners will often tell you they are not charging a commission on what they are selling. Here it is again, the no-front-load fund. They may not be taking a commission from your investment up front, but they're getting one paid to them and you're paying it in the form of those large 12b-1 fees and/or rear end load.
Whenever a commissioned sales person is involved in any type of transaction you will pay more for the product or service than you would if you did it yourself. It's only logical, the commission always has to come from the consumer. There is nothing wrong with paying someone for good service, but to pay someone hundreds or thousands of dollars to recommend an investment that you can pick on your own is, in my opinion, ludicrous.
A broker who suggests great products, follows up, takes care of problems, and is concerned about your overall financial health is worth paying. If you are one of the lucky few with a broker or planner who fits that bill, congratulations; if not, why have one at all?
Most people are capable of investing on their own, cutting the middleman (that broker or planner) out of the picture and saving a lot of money right from the start. With mutual funds nothing could be easier.
Find a good no-load or low-load fund, one that invests to suit your goals. Taking a chance for a higher return over a longer period of time? Find an aggressive growth fund. Is quality a concern? Then a blue chip (older, more established) stock fund may be right for you.
If you want some income along the way, go for a growth and income fund or an equity income fund. Looking for a well diversified portfolio with stability and some growth? Then you may be a candidate for a balanced or asset allocation fund. These use a combination of stocks for growth and bonds for safety.
There are also funds that invest in certain sectors of the economy, if that's what you're looking for: health-care funds, energy funds, technology funds and much more. Whatever you're looking for, there's likely a fund that's just right for you.
You've decided to pick your own no-load mutual fund: now what do you do? Obviously there are a lot of products to choose from. How do you decide? In fact, there are thousands of mutual funds: some good, some not so good. It can be confusing at best. Thank heaven, the major financial publications have come to your rescue. Every year or so most of the major financial magazines publish a scorecard or survey of long-term mutual fund performance.
Forget the best funds of the week, month or even year in the business papers. Some of the funds listed there will likely be "flash in the pan" funds. You want to look at how a fund has done over the long haul. There are no guarantees; in fact, mutual funds are required by law to tell you that "past performance is no guarantee of future results". But let me tell you that I believe that it's as good an indicator as you are going to find.
That's where these annual fund surveys come in. Some of the best are those in Money, Forbes, Business Week and Kiplinger's and they're cheap. Just call the magazine and you can order a back copy for 4 or 5 dollars or subscribe to one or two of them, which is not such a bad idea in itself. You can also find these in most libraries or on the web.
One of the best detailed mutual fund publications is Morningstar. You can find it in the reference section of larger libraries. If you want more in-depth fund research, this is the place to find it.
Once you've found the right fund, trust your decision and leave the money alone. Don't worry if the market drops 500 points...it will probably come back. Don't be concerned about some looming depression. Investors made money in stocks through most of the '30s and certainly did afterward. Sensible, long-term investing has always paid off and probably always will.
Those Hidden Fees
The days of handing your money to your neighborhood stockbroker are numbered. We are entering the age of do-it-yourself investing. It shouldn't come as a surprise. In fact, the only surprise is that it took so long.
Why does investing on your own make so darn much sense? Primarily because of the incredible sums of money that you are likely to save when you take responsibility for your investments. Warren Buffet, manager of Berkshire Hathaway, one of the most highly regarded investors of our time, recently stated that individuals are likely to be better off making their own investment decisions. He doesn't feel that today's "professional" financial planners offer much in return for their steep fees and commissions. Another voice adding to the chorus proclaiming that you can do-it-yourself.
Warren talks about savings he is talking serious money. The typical commission on a $10,000 mutual fund investment through a full service broker is $500. Enough to pay for an annual subscription to this newsletter, Forbes, Money, buy two good investment books, some Quicken software, a tank of gas to get to the library a few times, new reading glasses, and a couple of pizzas to celebrate. From there on, your savings are pretty much yours to grow.
Don't be fooled by the apparent lack of a commission or sales charge. One is almost always attached to a product sold by an insurance agent, financial planner, or stockbroker. Mutual fund "b" shares still pay the broker 5% or so and get it back from you through 1% (or greater) 12b-1 fees charged annually against the funds' assets (your assets).
For the US readers:Those 'no-load' variable annuity pitches fail to inform you that the agent or broker makes about 4% (or more) on the sale of the annuity. Again, you pay that fee back through the annual expenses. A no-load mutual fund will typically charge 1% per year for management, etcetera, while a similar fund in a variable annuity can cost you 2% or more per year.
But what about those tax savings, don't they more than make up for the extra cost? Let's assume two different growth funds with exactly the same portfolio. One has total annual expenses of 1% while the other (in a variable annuity) charges 2%. Both funds have an average annual return of 10% before expenses. Both distribute a total of 2% in annual income and realized capital gains. At the end of one year, assuming a 28% tax bracket, would you have more in the annuity where the taxes are deferred or in the growth fund where you had to pay taxes on the gain?
You are such a smart bunch! That's right, contrary to the sales pitch, you would have more in the regular old non-deferred, growth fund. Had you invested $10,000 in both you would have $10,800 in the annuity. However, even after paying taxes on the distribution, you would have $10,844 in the plain, old growth mutual fund.
Then let us assume that the values of both remain the same for the next 6 months and you decide to liquidate your investment. In the 28% bracket, you would end up with $10,576 from the variable annuity after taxes. The growth fund would net you $10,675, because of the preferential tax treatment attached to a capital gain. All annuity gains are deferred, but end up being taxed as regular income. (We would never suggest that you liquidate an annuity after 18 months. For that matter, we wouldn't suggest selling a growth fund in that short time frame; we are just trying to make a point.)
If you died and left the accounts to your heirs the annuity fares even worse. The beneficiary of the annuity would have to pay income taxes (again assuming a 28% bracket) and would end up with $10,576 . Whereas, the recipient of the growth fund could sell it and reap the entire $10,844 (because appreciated assets are passed to heirs at a stepped up cost basis).
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