Mutual Funds
Although Clark Financial Advisors uses pure no-load mutual funds it is important for you to understand the alphabet soup of mutual funds.
Mutual funds are the mutual ownership of stocks and bonds combined into a single investment vehicle. As an example, if everyone in the room today were to contribute $100 into a single investment fund and we used the proceeds to buy shares of General Motors, General Electric, etc…we would have created a mutual fund that is designed to purchase individual equities. Mutual funds are an ideal way for investors to participate in the markets as they offer the opportunity to seek professional management, diversity and efficiency in the buying and selling of securities.
There are an enormous number of mutual funds, over 7,000 at last count, yet this presentation will focus only on the delivery of those mutual funds. Many solicitors will be asking your physician to make investments in mutual funds and it is important for you to understand the difference between management fees and simply delivery charges:
The first step in determining which mutual funds should be purchased is basically a financial planning question. What are the investment goals and objectives and how will they be achieved? Are you looking for capital appreciation or income? What is the physician’s risk tolerance, what kind of volatility will the fund have? Etc… Nevertheless, lets focus primarily on the key components of the mutual fund to determine, after the above questions have been answered, what is the best way of selecting a fund.
- Management fees — Management fees are the fees that are charged by the investment professional that is making the decision on which stocks or bonds to purchase. Management fees for fixed income mutual funds, such as bond funds, run anywhere from .1 of 1% to 1.8%. It is strongly advisable that fixed income mutual funds (bonds) should carry a management fee no greater than 50 basis points or ½ of 1%.
Equity mutual funds have a substantial variance in their administrative costs, as well. You will find equity funds with administrative fees as low as 25 basis points or .25 of 1% to over 2%. We recommend that you keep equity administrative costs under 1.4%. - The delivery charges — Mutual funds are sold in four different packages. These packages represent delivery charges of the mutual fund to you, the investor. Mutual funds can be identified as A shares, B shares, C shares, and no-load mutual funds shares. Lets take a look at each:
A shares — A shares are mutual funds which bare the cost of a commission to be paid to an agent in exchange for selling or delivering the mutual fund to the investor. Fees often run from 3.5% to 5.75% and are deducted on the front end of an investment. As a result, for $10,000 being invested in an A share the investor will lose as much as $575 the first day as a surrendered commission to the agent.
B shares — B shares offer virtually the same commission to an agent, ranging from 3.5% to 5.75%, yet the investor does not notice an immediate reduction in the amount of principal being invested. As a result, a $10,000 investment in B shares will appear to be $10,000 the next day. Nevertheless, if the investor wants to make an alternative investment and seeks to recover his or her funds they will encounter a contingent surrender charge which declines over 5-7 years periods. This fee will decline usually at about 1% a year. (6% the first, 5% the second, etc…) Class B shares are by far the most expensive mutual fund vehicles within the mutual fund families. Not only does the contingent sales charge hang over one’s head, but since the commission has been advanced to the broker the mutual fund must repay itself with high administrative costs, as well. Often times you will find the administrative costs of class B shares is substantially higher than class A shares and will undoubtedly contain what is referred to as a 12B1 fee which continues to go to the agent or broker. We have found that the greatest area of abuse by brokers is in class B shares as they are often represented to the investment public as “no-load” because of their lack of apparent immediate sales charges. We have also found that the full details of the deferred sales charges are seldom disclosed and many times when an investor will qualify for what are referred to as break points with class A shares, resulting in lower commissions to be paid on the A share, the B share is sold to the investor, so that the full commission can be received.
C shares — Class C shares are sometimes referred to as institutional shares and carry a 1% charge. There is often a 1% deferred sales charge if the fund is surrendered within the first year. The deferred sales charge is retired after the first year. A 1% 12B1 fee is then paid to the agent while the fund is still in place.
Pure No-load Mutual Funds — A pure no-load mutual fund is a fund that has no front or rear end sales charge, nor any 12B1 fees to be paid to the agent. Investments in no-load mutual funds, although requiring a bit more homework by you and your physician, will allow for the most efficient use of investment funds. (Mutual Funds have fees and expenses embedded in the fund itself. You need to carefully review the prospectus to understand all fees charged by the mutual fund.)
Questions that should be asked for anyone offering mutual funds:
- What class share are you offering? Is it an A, B, C or no-load mutual fund?
- What is the management fee within the mutual fund?
- What is the trading cost of the fund? (Personalfund.com) (This can add another 1.1.5 points to your cost)
- What is the tenure of the manager of the fund in his or her job as manager?
- Does this mutual fund fall within the risk tolerance scope of my physician? (this assumes that the investment professional you are speaking with has determined what the risk tolerance of your physician is!)
