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 financial advisor 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 something more suitable for her to be investing in?
---B.H., by email from Dallas
A. This isn't enough information to know what's really going on here. If the fees are as you state, her investment 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 statement 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 characterizes balanced funds. If it is an expensive account that manages to provide a return in the top 25 percent of comparable 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 advisors regularly measure performance.
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. 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 handful 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., by email from 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 landscape. 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 present 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.
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 purchase, but you'll get low-expense, low-turnover funds with good management.
This article contains the opinions of the author but not necessarily the opinions of AssetBuilder Inc. The opinion of the author is subject to change without notice. All materials presented are compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This article is distributed for educational puposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
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