Q. For the past 20 years, I have invested in load mutual funds because I thought I could get a better return on my investment. I recently changed investment companies and was told that I should consider selling my load funds and switch to a no-load fund and save fees. Is this a good investment strategy? I am 50 years old and I plan to retire around the age of 62. —C.H., by email
A. Let's start with a primary truth: You don't get access to some secret sauce by paying a commission. You get access to a financial organization that maximizes its sales revenue by telling people it has a secret sauce that allows it to earn superior returns. In fact, there is no evidence that commissions or higher costs give you access to higher returns. What commissions do provide is an immediate reduction in your assets and an immediate income for the salesperson.
There is only one eternal verity in investing. It is this: Expenses are unending, but performance varies.
Alas, that doesn't mean you will be blessed with higher returns by moving to no-load funds. Some no-load funds have higher expense ratios than similar load funds. In addition, your new investment company may be trying to sell you a "wrap" account so they can charge you an annual fee to manage your lower cost no load portfolio rather than commissions to buy mutual funds.
What counts is that you find a way to manage your money so that the total long-term cost is as low as possible. This was important during our long, but nearly forgotten, bull market. It is even more important today, when fixed income yields are at historic lows and equity returns have been lower than their long-term average.
Since you have already paid the commission on the funds you have, one good test would be to compare the total expense of the funds you have with the total expense of your new offer, which is probably the cost of funds plus a management fee. The person representing your new investment company should be capable, and willing, to do this for you. If they aren’t, move on.
Q. I hope you will address the current long-term-care insurance environment. In my case, I purchased a group long-term-care policy through John Hancock Life Insurance. It looked reasonable and prudent since my family history is to have a long lingering healthcare needs from strokes. But today I opened a letter informing me of a 76 percent premium increase from $211 a month to $371 a month. Such an increase can only be based on astoundingly poor actuarial and cost forecasts. Fortunately I am 58, have only been insured for about 2 years, so changing would not be an issue.
Since pricing is somewhat determined by when you create the contract, choosing the correct —or nearly correct — horse out of the gate seems critical. How do I research this market and mitigate having such an adverse event? Is other other due diligence is needed? —G.H., Galveston, TX
A. While many long-term care insurance premiums were "low ball" premiums that under-estimated policy retention and use, lower investment returns on premium dollars have been the single largest, and most common, reason for premium increases. Insurance companies invest premium income and usually count on investment returns to contribute about 40 percent of the benefit dollars. But insurance companies are no different from other institutional and individual investors — returns in recent years have been poor to negative.
Unfortunately, LTC insurance providers were low balling buyers even when investment returns were at historical highs. So what we have in long term care insurance is a wonderful idea that has been poorly executed for a long time. It is unlikely that more due diligence will improve the odds of having a “no premium surprise” future.
My suggestion is that you explore other avenues of long-term care assurance, such as considering a move to a Continuing Care Retirement Community. These aren't financially perfect, either, but I have yet to receive a single reader letter complaining about costs or what they have experienced.