George Morgan's Blog, page 22

Growth vs. Value

By law, every mutual fund must provide investors with a legal document, called a prospectus, which details the investment approach that the portfolio manager will take. The funds investment approach is called its style. This style can be conservative, aggressive, a mix of stocks and bonds or all international, to name a few. Two of the biggest style categories are growth investing and value investing. Value investors seek to buy stocks whose market price they feel is less that the value of th...

A Really Cheap Lunch

The fees associated with an actively managed fund are the result of that just that, active management. The buying and selling of stocks within the portfolio generates transactions cost and the financial services industry seems to feel that portfolio managers deserve large salaries and bonuses. In a passively managed index fund neither of those two elements are present.  There is no decision to be made about which stocks to include in the portfolio and thus no need for an expensive portfo...

No Free Lunch Two

The mutual fund fees that I have been talking about apply only to actively managed mutual funds, not to index funds. These fees are to cover commissions on trading activity, salaries and bonuses paid to the fund managers, and all the other fees associated with running a mutual fund such as accounting and advertising. However, the vast majority of the fees fund owners pay are connected to trading expenses and managers’ salaries and bonuses. Think about it. Compound 1 ½% over the course of seve...

No Free Lunch

There are three places that the average investor can acquire actively managed mutual funds. The first is through a broker or financial advisor, the second is from a discount broker and the third is directly from the mutual fund itself. If you purchase an actively managed mutual fund through a broker or financial advisor, the highest probability is you that you will purchase a no load fund. This means that you will pay a commission of approximately 3% of the total amount that you purchase. If...

Malkiel Two

Burton Malkiel asks the rhetorical question; “Why do investors continue to pay high fees for financial services that are of questionable value?” His rhetorical answer is that many investors suffer from overconfidence and truly believe that they can select the best investment managers and receive above market returns. He questions whether the investors that continually pay high fees either are unaware of the historical data concerning active investment management or whether they simply believe...

Burton Malkiel On Fees

Jason Zweig is on vacation this week, which leaves my Saturday morning a bit empty. So, I am flipping back to a column in the Wall Street Journal written by one of the founding fathers of index investing, Burton Malkiel. The title of the piece is, “You’re Paying Too Much For Investment Help. Mr. Malkiel points out that from 1982 to 2006 the financial services sector grew from 4.9% of GDP to 8.3% of GDP. He further points out that there are substantial economies of scale in asset management; i...

Investment Commissions vs. Advice Fees

I feel a need to expand on my previous discussions about the fees charged by brokers. Today’s stock market does not operate the same way it did forty years ago. In response to the evolutionary changes in the market the financial services industry has made adjustments. Forty years ago commissions on stock trades and sales charges on mutual funds were the only source of revenue for brokers. In those days there was greater justification for the trading of individual stocks than there is today. T...

More Fee Questions

The Department of Labor is not the only one questioning fees charge by a the Financial Services industry on retirement accounts; A Yale economics professor is publishing the results of a study he conducted on the fee structure of over 6,000 401(k) plans. He is causing quite a ruckus because he has sent out letters to these companies saying he would disseminate results of his study on twitter with separate hashtags for each company. While I feel that he is tactics are a bit over the top, I agr...

Big Pot At Stake

While few details of the Department of Labor’s effort to impose fiduciary responsibility in IRA accounts are available, one thing is certain; the pot is big enough that the Financial Services industry is not going to go away without a fight. Currently, there are $5.4 trillion dollars in IRA accounts. This is approximately 40% of the markets total value and has the potential to generate tens of billions of dollars in revenues for brokerage firms. While we don’t have adequate data on what perce...

Department Of Labor Two

In their effort to regulate IRA’s, the Department of Labor is proposing to require commission brokers have the same fiduciary responsibly that Registered Investment Advisors do. The devil is in the details, but, basic this means that broker’s actions or recommendations must be in the best interest of the client, not the broker. (Makes you wonder what they do now.) For example, if a broker recommends that an IRA investor sell a stock they currently own and buy a different one, the broke must d...