Publication: Investor's Notebook
GAUGING THE COST OF MONEY MANAGEMENT | |
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Investor's Insight - Friday, April 7, 2006
"A Digest of Investment Opinion From the
World's Leading Financial Advisers"
Comment The Post Below...
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GAUGING THE COST OF MONEY MANAGEMENT
by Scott Burns
Q: Recently, my grandmother, who is 102, asked me to look
at her investments. She just didn't think they were doing
as well as she thought they could be. She was also paying
a lot of fees. Right now, she has her investments in four
different accounts with a major brokerage firm. The acc-
ounts total about $560,000.
This is her only income source other than Social Security
of about $500 a month. She is paying managers about $400
per quarter for each account. She is also paying her fin-
ancial adviser at the brokerage firm a fee of about $3,000.
In addition, her taxes are several pages long, due to all
the buying and selling within her accounts. Is there some-
thing more suitable for her to be investing in?
-- B.H., Dallas
A: This isn't enough information to know what's really
going on here. If the fees are as you state, her invest-
ment management costs are running about $9,400 a year --
$6,400 for the four managers and $3,000 for her account
manager. That's "only" 1.7 percent of her $560,000 account
value. That's low for typical brokerage "wrap" accounts.
So I suggest that you do some information gathering. First,
check her statements and try to get a good measure of what
her advisory costs are as a percentage of assets managed.
Second, if she doesn't have a "wrap" account,
which eliminates brokerage commissions, check the impact
of commission costs.
Third, get the account representative to provide a state-
ment of annualized return on the account and to compare
it to a comparable category of mutual fund, e.g., moderate
or conservative allocation, as Morningstar now character-
izes balanced funds. If it is an expensive account that
manages to provide a return in the top 25 percent of com-
parable managed funds, both you and your grandmother
should feel differently than if it provides a return in
the bottom 25 percent of comparable managed funds.
Don't accept any doubletalk in getting such benchmarked
figures. Responsible advisers regularly measure perfor-
mance.
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Q: I am a fairly young investor (35) just trying to get
started with a financial planner. Instead of mutual funds,
he recommended unit investment trusts (UITs). I don't hear
or read about them very much, so I was surprised at his
selection instead of a true mutual fund. Are the UIT front-
end and back-end loads similar to funds, or do they vary?
What about monthly fees or expenses?
Would I be better off with a UIT, a mutual fund or a hand-
ful of individual stocks? Is there cause for concern here?
If you were 35, aggressive and ready to go with $40,000,
would you go with UITs, mutual funds or something else?
-- T.G., Dallas
A: Be wary. Unit investment trusts generally make more
sense for the marketer than they do for the investor. They
are also a relatively small part of the investment land-
scape. According to the Investment Company Institute, for
instance, total investment in some 6,485 UITs at the end
of 2004 was $36.8 billion. New investments in January were
just over $3 billion. To put this in perspective, there
are 16 individual mutual funds that have more assets than
the entire UIT market.
While UITs often have minimal operating expenses, they
carry substantial front-end commissions. They also pre-
sent a significant problem if you want to sell before
maturity -- the most common market-maker is the brokerage
firm that issued the original UIT. As a consequence, the
bid/ask spread can be uncomfortably large.
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In other words, you can get skinned going in and going out.
You shouldn't be surprised at this. A 6 percent commission
on a $40,000 investment is only $2,400. Usually, less than
half of it will go to the salesperson.
In your shoes, I'd eliminate both UITs and individual
stocks. I'd invest in no more than four mutual funds --
no-load funds, preferably index funds. If you are inclined,
you can add more funds later.
If you don't feel confident to make your own decisions,
find a broker happy to sell funds from the American Funds
group. You'll pay a 5 percent commission on a $40,000 pur-
chase, but you'll get low-expense, low-turnover funds with
good management.
(Investor's Insight reflects the opinions of experts. It does
not recommend any specific investments, and no endorsement is
implied or should be inferred. For more information, contact
the individual firms cited).
COPYRIGHT 2006 UNIVERSAL PRESS SYNDICATE
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