True Cost of Mutual Fund Ownership

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Aug 22, 2008 4:50 pm

Are any of you esteemed fee chargers explaining the actual cost of owning mutual funds, in addition to the fees that you pile on top?

ST CG Distributions tax - ordinary rate.
LT CG Distributions DIV Distributions - ordinary rate. Overpayment of CG tax, upon liquidation,  because you failed to explain that the above distributions are used to adjust the cost basis.  Turnover cost at 80 - 100 bps per 100% turnover. Cost of extra cash in the portfolio, used for redemptions, not earning equity returns. Cost of exposing the client to AMT and taxation of Soc. Sec. Benefits.
Loss of tax credits. Loss of tax deductions Your fees are only deductible to the extent that they exceed 2% AGI.
Taxes due to rebalancing. Although most of you don't do it because you don't want to pay ticket charges. Cost of probate - 3-5%. Cost of future performance due to you taking your fee.
And so on and on and on.... Well?
Aug 22, 2008 5:25 pm
Vic Mackey:

Are any of you esteemed fee chargers explaining the actual cost of owning mutual funds, in addition to the fees that you pile on top?



ST CG Distributions tax - ordinary rate. - What if it's IRA money? 
LT CG Distributions - Not all funds have LT Cap gains.  Some actually have embedded cap losses.  I'd explain that concept to you, but your brain might hurt from being exposed to something complex.
DIV Distributions - ordinary rate. -  Hmmm...last I saw, the tax codes were that on most dividends you don't pay ordinary income taxes.  At least with US companies.  See, there are qualified dividends and non qualified dividends.  On qualified dividends you pay a max of 15% in taxes.     
Overpayment of CG tax, upon liquidation,  because you failed to explain that the above distributions are used to adjust the cost basis. - I wouldn't really say this is a mutual fund issue.  Vanguard has no way to control whether or not their clients understand this issue.  So, it's more of an advisor issue, not a mutual fund issue.   
Turnover cost at 80 - 100 bps per 100% turnover. - So, where does my client see this number?  I've read the reports, but if I can't really quantify the numbers with my clients, then do I really need to discuss it with them.  I discuss disclosed operating expenses and commissions with my clients.  As far as I know, I'm not required to discuss expenses that may or may not exist or affect their performance. 
Cost of extra cash in the portfolio, used for redemptions, not earning equity returns.  - Isn't this a double edged sword.  For instance, you and I have the exact same holdings in our portfolios, but I have a 5% cash position.  In the last 12 months, wouldn't I have more money than you because I have 5% of my money not going down?  If a money manager is 100% invested and he has net liquidations, isn't he forced to sell some shares that he might not really want to sell?   Do I need to explain the net liquidations concept to you? 
Cost of exposing the client to AMT and taxation of Soc. Sec. Benefits.  - What if I use an AMT free fund?   
Loss of tax credits. - I'm really not sure what this has to do with funds.  How does investing in Hartford Cap App cause me to lose my tax credits? 
Loss of tax deductions - Same question as before. 
Your fees are only deductible to the extent that they exceed 2% AGI. - Yep, you're correct.  How deductible are the M&E expenses on an annuity?  What, something like 0%.   
Taxes due to rebalancing. Although most of you don't do it because you don't want to pay ticket charges. - Again, what about if it's IRA money?  The only other alternative I can think of to this in an annuity that auto rebalances.  Then you have to discuss with your clients not only turnover, excess cash held by subaccount managers, etc, but also M&E charges, surrender schedules, cost of riders that I'm sure you throw on your annuities, and investment limitations. 
Cost of probate - 3-5%. - Seriously, you're not talking about mutual funds and the cost of probate in the same breath are you?  I get it that with a named beneficiary you avoid probate.  So, do the right thing for your clients and set up a TOD or intro them to your favorite attorney and set up a trust. 
Cost of future performance due to you taking your fee. - How about BECAUSE you are paying a fee, you WILL see better performance.  Annuities have similar expenses to a fee based account.  Sometimes even more.  And they aren't negotiable.  Your annuity client hands you $1 MM and you're still going to charge him 1.5% on the M&E.  With a lot of guys, you hand them a $1 MM check and they'll negotiate their fee with you. Ever tried to negotiate an M&E with Hartford or AXA? 

And so on and on and on.... Well?

You're an idiot.  There are so many things on this list that have absolutely nothing to do with mutual fund ownership.  I really hope that you're not telling your clients to avoid mutual funds because of probate, tax deductions, and tax credits.  And if you are, I hope one of them figures it out and takes you to arbitration. 
Aug 22, 2008 5:48 pm
Spaceman Spiff:
Vic Mackey:

Are any of you esteemed fee chargers explaining the actual cost of owning mutual funds, in addition to the fees that you pile on top?



ST CG Distributions tax - ordinary rate. - What if it's IRA money? THen everything is taxed at the ordinary rate.
LT CG Distributions - Not all funds have LT Cap gains.  Some actually have embedded cap losses.  I'd explain that concept to you, but your brain might hurt from being exposed to something complex. Based on some of your answers, you shouldn't be explaining anything to anyone.
DIV Distributions - ordinary rate. -  Hmmm...last I saw, the tax codes were that on most dividends you don't pay ordinary income taxes.  At least with US companies.  See, there are qualified dividends and non qualified dividends.  On qualified dividends you pay a max of 15% in taxes.   I forgot. You got me. I'm not used to clients having to pay taxes on their investments.   
Overpayment of CG tax, upon liquidation,  because you failed to explain that the above distributions are used to adjust the cost basis. - I wouldn't really say this is a mutual fund issue.  Vanguard has no way to control whether or not their clients understand this issue.  So, it's more of an advisor issue, not a mutual fund issue.  Read the comment. It says "because YOU failed to explain"... 
Turnover cost at 80 - 100 bps per 100% turnover. - So, where does my client see this number?  I've read the reports, but if I can't really quantify the numbers with my clients, then do I really need to discuss it with them.  I discuss disclosed operating expenses and commissions with my clients.  As far as I know, I'm not required to discuss expenses that may or may not exist or affect their performance. I guess I'm used to disclosing everything that is material. You can call the fund company and ask them. They know the answer. 
Cost of extra cash in the portfolio, used for redemptions, not earning equity returns.  - Isn't this a double edged sword.  For instance, you and I have the exact same holdings in our portfolios, but I have a 5% cash position.  In the last 12 months, wouldn't I have more money than you because I have 5% of my money not going down?  If a money manager is 100% invested and he has net liquidations, isn't he forced to sell some shares that he might not really want to sell?   Do I need to explain the net liquidations concept to you? Yes, explain it to me.
Cost of exposing the client to AMT and taxation of Soc. Sec. Benefits.  - What if I use an AMT free fund?   You don't. 
Loss of tax credits. - I'm really not sure what this has to do with funds.  How does investing in Hartford Cap App cause me to lose my tax credits? As long as you're ignorant, you can claim ignorance. I don't want to ruin that status for you. 
Loss of tax deductions - Same question as before. Same question as before.
Your fees are only deductible to the extent that they exceed 2% AGI. - Yep, you're correct.  How deductible are the M&E expenses on an annuity?  What, something like 0%. They are 100% deductible. They are NEVER taxed.   
Taxes due to rebalancing. Although most of you don't do it because you don't want to pay ticket charges. - Again, what about if it's IRA money? You don't know the answer? The only other alternative I can think of to this in an annuity that auto rebalances.  Then you have to discuss with your clients not only turnover, excess cash held by subaccount managers, etc, but also M&E charges, surrender schedules, cost of riders that I'm sure you throw on your annuities, and investment limitations. 
Cost of probate - 3-5%. - Seriously, you're not talking about mutual funds and the cost of probate in the same breath are you?  I get it that with a named beneficiary you avoid probate.  So, do the right thing for your clients and set up a TOD or intro them to your favorite attorney and set up a trust. Then we have to discuss the attorneys fees and trust fees on top of loss of control. 
Cost of future performance due to you taking your fee. - How about BECAUSE you are paying a fee, you WILL see better performance.  I'm sorry, but the guys selling annuities are the only ones that can tell people what WILL happen.  Annuities have similar expenses to a fee based account.  Sometimes even more.  And they aren't negotiable.  Your annuity client hands you $1 MM and you're still going to charge him 1.5% on the M&E.  With a lot of guys, you hand them a $1 MM check and they'll negotiate their fee with you. Ever tried to negotiate an M&E with Hartford or AXA? Never had to. People like the returns and guarantees so much that they're willing to pay the fees. What I do tell them is that the first think we're gonna do is turn off that pesky fee that the broker charges whether he makes money or not. They're usually quite happy with that. 

And so on and on and on.... Well?

You're an idiot.  There are so many things on this list that have absolutely nothing to do with mutual fund ownership.  I really hope that you're not telling your clients to avoid mutual funds because of probate, tax deductions, and tax credits.  And if you are, I hope one of them figures it out and takes you to arbitration. The ignorance that you've demonstrated here leaves me feeling pretty secure in what I'm doing. Luckily, there are a lot of guys just like you.
Aug 22, 2008 7:33 pm

Hah, great reply Spiff!

 
Vic, VAs can be great products and definitely have their place, but they are not the "end all be all" of securities as you make them out to be.  VAs cost more than MFs and rightly so for all their benefits and "guarantees."
Aug 22, 2008 9:33 pm
JBrowntown:

Hah, great reply Spiff!

 
Vic, VAs can be great products and definitely have their place, but they are not the "end all be all" of securities as you make them out to be.  VAs cost more than MFs and rightly so for all their benefits and "guarantees."



The cost of VA's is less than MF's AND they have guarantees. Spacey Queef has already shown all of us his dishonesty and ignorance.

Aug 22, 2008 9:42 pm

Yaaaaaaaawwwwwwwwnnnnnnnnnnn

Aug 22, 2008 9:51 pm

Are any of you esteemed fee chargers explaining the actual cost of
owning mutual funds, in addition to the fees that you pile on top?

ST CG Distributions tax - ordinary rate.
LT CG Distributions DIV Distributions - ordinary rate. Overpayment
of CG tax, upon liquidation,  because you failed to explain that the
above distributions are used to adjust the cost basis.  Turnover cost at 80 - 100 bps per 100% turnover. Cost of extra cash in the portfolio, used for redemptions, not earning equity returns. Cost of exposing the client to AMT and taxation of Soc. Sec. Benefits.
Loss of tax credits. Loss of tax deductions Your fees are only deductible to the extent that they exceed 2% AGI.
Taxes due to rebalancing. Although most of you don't do it because you don't want to pay ticket charges. Cost of probate - 3-5%. Cost of future performance due to you taking your fee.
And so on and on and on.... Well?
Aug 22, 2008 11:15 pm
Bobby, what happened?  Did you kick everyone off of your board who had a disagreement with you, so you have to keep coming back here to have a conversation?
 
Do your clients planning on dying having spent every penny or do they plan on leaving some of their investments to their children?  For those who care about leaving money behind, that needs to be a consideration.
 
Aug 22, 2008 11:45 pm

$9, pretty cheap huh?

Aug 23, 2008 12:15 am

How come none of you gutless snake oil salesmen will address the real costs of owning mutual funds and smothering them in your fees? You don't seem to have a problem showing your ignorance about annuities. Why not show your ignorance about your snake oil? You and indexed annuity salesmen are the scourge of the industry. 

Aug 23, 2008 12:16 am
anonymous:
Bobby, what happened?  Did you kick everyone off of your board who had a disagreement with you, so you have to keep coming back here to have a conversation?
 
Do your clients planning on dying having spent every penny or do they plan on leaving some of their investments to their children?  For those who care about leaving money behind, that needs to be a consideration.
 



Nope. Just the gay people.

Aug 23, 2008 12:18 am

$9

Aug 23, 2008 5:39 pm

I see fees like fat people drinking Diet Coke with their Big Mac...cut corners where you can.

 
That being said, I want to gross as close to 1% as possible per year of any AUM before it hits my grid.  So C shares do that, L-share VA's do that (the 4% upfront is nice too), and managed accounts do it when I charge between 1.25-1.5% depending on account size.
 
So I look at these investments and here's what I see:
 
C shares:  Good for accounts less than $100k, has a 1 year CDSC.  Expenses might be in the neighborhood of 1.75%. 
 
Wrap account:  With mutual funds, your expenses might range from 1-1.3%.  Tack on the 1.5% wrap fee and the client is paying 2.5-2.8% (-.25 if charging 1.25%).  If you throw in some less expensive funds or ETF's, you might be at 2-2.5%...small, but not a huge difference.
 
With a VA, I can have the client well diversified, get guarantees both on step up of income base and lifetime income, and be all in at 3.04%.
 
All the tax-related issues Vic has brought up aside, solely based on fees, VA's do not seem to be the "fee nightmare" they are made out to be.  I didn't include trading expenses in addition to the fund expenses for the mutual funds, so in reality, it might make the wrap account with mutual funds the same cost as a VA with UIT-style subaccounts.  Yes apples to oranges, but I wouldn't put a standard MF in a VA.
 
Bottom line is that I think it costs a lot more than most investors realized to be in mutual funds.  If this is the case, why wouldn't someone want a guarantee?
 
Advice is advice.  We deserve to be compensated for it.  Thoughts?
Aug 23, 2008 7:31 pm
snaggletooth:

I see fees like fat people drinking Diet Coke with their Big Mac...cut corners where you can.

 
That being said, I want to gross as close to 1% as possible per year of any AUM before it hits my grid.  So C shares do that, L-share VA's do that (the 4% upfront is nice too), and managed accounts do it when I charge between 1.25-1.5% depending on account size.
 
So I look at these investments and here's what I see:
 
C shares:  Good for accounts less than $100k, has a 1 year CDSC.  Expenses might be in the neighborhood of 1.75%. 
 
Wrap account:  With mutual funds, your expenses might range from 1-1.3%.  Tack on the 1.5% wrap fee and the client is paying 2.5-2.8% (-.25 if charging 1.25%).  If you throw in some less expensive funds or ETF's, you might be at 2-2.5%...small, but not a huge difference.
 
With a VA, I can have the client well diversified, get guarantees both on step up of income base and lifetime income, and be all in at 3.04%.
 
All the tax-related issues Vic has brought up aside, solely based on fees, VA's do not seem to be the "fee nightmare" they are made out to be.  I didn't include trading expenses in addition to the fund expenses for the mutual funds, so in reality, it might make the wrap account with mutual funds the same cost as a VA with UIT-style subaccounts.  Yes apples to oranges, but I wouldn't put a standard MF in a VA.
 
Bottom line is that I think it costs a lot more than most investors realized to be in mutual funds.  If this is the case, why wouldn't someone want a guarantee?
 
Advice is advice.  We deserve to be compensated for it.  Thoughts?



I wouldn't cast the tax issues aside like the snake oil salesmen fee chargers do. It's real out of pocket money that goes to the govt.

Aug 24, 2008 9:50 am

So Vic why don't you share with us your great way of saving the client mucho bucks? The cost is the cost. As long as we disclose and the client agrees, end of story.

Aug 25, 2008 3:31 pm

[quote=]

Spaceman Spiff:
Vic Mackey:

Are any of you esteemed fee chargers explaining the actual cost of owning mutual funds, in addition to the fees that you pile on top?



ST CG Distributions tax - ordinary rate. - What if it's IRA money? THen everything is taxed at the ordinary rate. - Which is identical to what happens with there are withdrawals from your annuity.  Do you explain that to your clients?  I have a question.  If one of your annuity clients has to take an RMD, doesn't need the money, but is happy with his current investments, can you do an in kind distribution from an annuity?     
LT CG Distributions - Not all funds have LT Cap gains.  Some actually have embedded cap losses.  I'd explain that concept to you, but your brain might hurt from being exposed to something complex. Based on some of your answers, you shouldn't be explaining anything to anyone.  - The explanation would be lost on you anyway. 
DIV Distributions - ordinary rate. -  Hmmm...last I saw, the tax codes were that on most dividends you don't pay ordinary income taxes.  At least with US companies.  See, there are qualified dividends and non qualified dividends.  On qualified dividends you pay a max of 15% in taxes.   I forgot. You got me. I'm not used to clients having to pay taxes on their investments. - You're just not used to investments that pay dividends.      
Overpayment of CG tax, upon liquidation,  because you failed to explain that the above distributions are used to adjust the cost basis. - I wouldn't really say this is a mutual fund issue.  Vanguard has no way to control whether or not their clients understand this issue.  So, it's more of an advisor issue, not a mutual fund issue.  Read the comment. It says "because YOU failed to explain"...  - Do you explain that in an annuity they are taxed on a LIFO basis, always.  So, as long as there are gains in a portfolio, they are going to be paying ORDINARY INCOME TAXES on ANY distributions, until those distributions outstrip the amount of gains?  So, unless you annuities or use something like Lincoln's i4Life, in which there would be a return of some principle, your clients are always going to be paying the most taxes they possibly can on distributions in a NQ account.  In a qualified account it's a moot point.   
Turnover cost at 80 - 100 bps per 100% turnover. - So, where does my client see this number?  I've read the reports, but if I can't really quantify the numbers with my clients, then do I really need to discuss it with them.  I discuss disclosed operating expenses and commissions with my clients.  As far as I know, I'm not required to discuss expenses that may or may not exist or affect their performance. I guess I'm used to disclosing everything that is material. You can call the fund company and ask them. They know the answer. - Do you disclose the same turnover costs in your annuity subaccounts?  They're there.   
Cost of extra cash in the portfolio, used for redemptions, not earning equity returns.  - Isn't this a double edged sword.  For instance, you and I have the exact same holdings in our portfolios, but I have a 5% cash position.  In the last 12 months, wouldn't I have more money than you because I have 5% of my money not going down?  If a money manager is 100% invested and he has net liquidations, isn't he forced to sell some shares that he might not really want to sell?   Do I need to explain the net liquidations concept to you? Yes, explain it to me. - It's really pretty simple.  Some mutual fund companies will keep a cash reserve on hand to send out liquidation requests so they don't have to liquidate holdings.  Others will net their liquidation requests again cash inflows.  Those are typically the funds that stay fully invested.  So, if their liquidations are more than their inflows (net liquidations), they have to sell some holdings to cover the difference.  They may not really want to sell anything at a time like this, but are forced to. 
Cost of exposing the client to AMT and taxation of Soc. Sec. Benefits.  - What if I use an AMT free fund?   You don't.  - You're right.  I don't use a lot of AMT free funds.  I also don't use a lot of tax free bond funds as I prefer straight bonds for the muni side.  I have spoken with all of my clients and their CPAs when we use muni bonds to find out if we need to be concerned about AMT.  So far, nobody has to.  
Loss of tax credits. - I'm really not sure what this has to do with funds.  How does investing in Hartford Cap App cause me to lose my tax credits? As long as you're ignorant, you can claim ignorance. I don't want to ruin that status for you. - Nice non-answer Mr. Obama.   
Loss of tax deductions - Same question as before. Same question as before.
Your fees are only deductible to the extent that they exceed 2% AGI. - Yep, you're correct.  How deductible are the M&E expenses on an annuity?  What, something like 0%. They are 100% deductible. They are NEVER taxed. - Just because they are never taxed doesn't make them 100% deductible.  Your clients still pay them.  Just like ours do.  And if for some reason those fees were to become more than 2% of AGI, then they COULD deduct them.  With your annuity only solution, that isn't even a possibility.     
Taxes due to rebalancing. Although most of you don't do it because you don't want to pay ticket charges. - Again, what about if it's IRA money? You don't know the answer? - If the answer is that there are no taxes for rebalancing an IRA, then yes, I do know the answer.  The only other alternative I can think of to this in an annuity that auto rebalances.  Then you have to discuss with your clients not only turnover, excess cash held by subaccount managers, etc, but also M&E charges, surrender schedules, cost of riders that I'm sure you throw on your annuities, and investment limitations. 
Cost of probate - 3-5%. - Seriously, you're not talking about mutual funds and the cost of probate in the same breath are you?  I get it that with a named beneficiary you avoid probate.  So, do the right thing for your clients and set up a TOD or intro them to your favorite attorney and set up a trust. Then we have to discuss the attorneys fees and trust fees on top of loss of control. - What control is someone losing if they use a trust?  Sure, you can stretch a NQ annuity, like an IRA.  But a TOD is cheap and a trust covers more than just their investments.  So, I don't see where they are losing control and the fees could be well worth the price.  The only thing you can cover with your annuity is the assets they have in that annuity.  You can't cover a house in an annuity.  Or cars.  Or land.  Or...
Cost of future performance due to you taking your fee. - How about BECAUSE you are paying a fee, you WILL see better performance.  I'm sorry, but the guys selling annuities are the only ones that can tell people what WILL happen.  Annuities have similar expenses to a fee based account.  Sometimes even more.  And they aren't negotiable.  Your annuity client hands you $1 MM and you're still going to charge him 1.5% on the M&E.  With a lot of guys, you hand them a $1 MM check and they'll negotiate their fee with you. Ever tried to negotiate an M&E with Hartford or AXA? Never had to. People like the returns and guarantees so much that they're willing to pay the fees. What I do tell them is that the first think we're gonna do is turn off that pesky fee that the broker charges whether he makes money or not. They're usually quite happy with that. - Funny thing is that I can have a conversation about both ways of doing business.  I can show clients annuities with all the guarantees, tax deferral, etc that you can  AND talk to them about fee based business, or commission based accounts and they get to choose what is important to them or what fits their needs most appropriately.  If all you are selling them is an annuity, then you are a one trick pony.   That ride gets pretty boring after a while.   

And so on and on and on.... Well?

You're an idiot.  There are so many things on this list that have absolutely nothing to do with mutual fund ownership.  I really hope that you're not telling your clients to avoid mutual funds because of probate, tax deductions, and tax credits.  And if you are, I hope one of them figures it out and takes you to arbitration. The ignorance that you've demonstrated here leaves me feeling pretty secure in what I'm doing. Luckily, there are a lot of guys just like you.

[/quote]

 
I am not anti annuity.  I like annuities and use them quite a bit.  But I am not stupid enough to use annuities as my only tool.  They cannot possibly be the ONLY solution for every client out there.  Some of the reasons you've given for not using mutual funds are just plain retarded.  But you've got yourself convinced that you are correct, so I know I'm just wasting my breath.