Comments on: What’s Wrong with the Mutual Fund? http://www.thickenmywallet.com/blog/wp/2008/05/12/whats-wrong-with-the-mutual-fund/ Everything to do with thickening your wallet by entrepreneur turned President of an Investment Company Fri, 12 Mar 2010 08:45:01 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Zahid Jafry http://www.thickenmywallet.com/blog/wp/2008/05/12/whats-wrong-with-the-mutual-fund/comment-page-1/#comment-10353 Zahid Jafry Mon, 12 May 2008 12:53:25 +0000 http://www.thickenmywallet.com/blog/wp/2008/05/12/whats-wrong-with-the-mutual-fund/#comment-10353 Great blog entry. You bring up a number of terrific points. I wanted to amplify a couple: 1) When is your mutual fund manager guilty of being closet indexer? a) It has a high R-squared (gives you a correlation between a fund and its benchmark index). The closer the R-squared is to 1, the more likely a closet indexed fund. b) Check the annual report of an actively managed and its benchmark index. Check to see if similar stocks are held with similar proportions. c) Compare recent returns of your actively managed fund and its benchmark index. Do the returns of the mutual fund regularly trail the index by its MER? 2) "You are not being sold the best mutual fund but the fund paying the best commission structure to the investment advisor or with the largest marketing budget." Undoubtedly, you're talking about trailer fees, which is paid by the fund company to an advisor for as long as the advisor's client remains invested in the company's fund. The purpose is to pay the advisor for ongoing services rendered to the client. However, a a fund company paying out a higher trailer fee than a rival company gives an advisor a stronger inclination to recommend that fund. Glorianne Stromberg, the former head of the OSC, pointed out that a higher trailer fee will very well result in the advisor favoring that mutual fund company "regardless of whether this benefits the clients or has tax consequences for the client." Imagine at work having the abiility to give yourself a bonus. Would you do it? An example of a fund company charging higher trailer fees than the rest of its peers is Russell Investments. Yes, their story brings tears my eyes (an institutional investment manager for retail clients), but these huge trailer fees mean higher MERs. With the average trailer fee of an equity fund at around 1%, Russell blows away the competition with a trailer fee of around 1.3%. An advisor to suggest LifePoints over a Quotential, for example, would be giving themselves a 30% bonus. It's hard to take a product seriously with such a generous compensation. Or, for that matter, it's easy to be skeptical of the intentions the advisor might have for suggesting it. Is it solely because they believe it's a quality product? Zahid Jafry Onus Consulting Group PS To Download our Investor Awareness Kit (where the above material was taken from), visit: http://www.onusconsultinggroup.com/requestinfo Great blog entry. You bring up a number of terrific points. I wanted to amplify a couple:

1) When is your mutual fund manager guilty of being closet indexer?
a) It has a high R-squared (gives you a correlation between a fund and its benchmark index). The closer the R-squared is to 1, the more likely a closet indexed fund.

b) Check the annual report of an actively managed and its benchmark index. Check to see if similar stocks are held with similar proportions.

c) Compare recent returns of your actively managed fund and its benchmark index. Do the returns of the mutual fund regularly trail the index by its MER?

2) “You are not being sold the best mutual fund but the fund paying the best commission structure to the investment advisor or with the largest marketing budget.”

Undoubtedly, you’re talking about trailer fees, which is paid by the fund company to an advisor for as long as the advisor’s client remains invested in the company’s fund. The purpose is to pay the advisor for ongoing services rendered to the client. However, a a fund company paying out a higher trailer fee than a rival company gives an advisor a stronger inclination to recommend that fund. Glorianne Stromberg, the former head of the OSC, pointed out that a higher trailer fee will very well result in the advisor favoring that mutual fund company “regardless of whether this benefits the clients or has tax consequences for the client.” Imagine at work having the abiility to give yourself a bonus. Would you do it?

An example of a fund company charging higher trailer fees than the rest of its peers is Russell Investments. Yes, their story brings tears my eyes (an institutional investment manager for retail clients), but these huge trailer fees mean higher MERs. With the average trailer fee of an equity fund at around 1%, Russell blows away the competition with a trailer fee of around 1.3%. An advisor to suggest LifePoints over a Quotential, for example, would be giving themselves a 30% bonus. It’s hard to take a product seriously with such a generous compensation. Or, for that matter, it’s easy to be skeptical of the intentions the advisor might have for suggesting it. Is it solely because they believe it’s a quality product?

Zahid Jafry
Onus Consulting Group

PS To Download our Investor Awareness Kit (where the above material was taken from), visit:
http://www.onusconsultinggroup.com/requestinfo

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