Prospectuses and mutual fund statements of my wife’s retirement account at Stifel Financial came in the mail over the past two weeks. I did the same thing with them that I’ve done in the 15 years my wife and I have been married.
I tossed the prospectuses in the recycle bin and filed the statements in a binder.
Then I did something I’d never done before. I unclipped the latest individual retirement account (IRA) statements for the month closing Aug. 31, and took a closer look at the funds in which my wife’s retirement advisor had invested her $75,000 in retirement assets.
Why now? Why suddenly take an interest in mutual fund statements that I’d not given any thought to previously?
With the Department of Labor (DOL) considering some of the most important changes to how advisors treat retirement assets since the passage of the Employee Retirement Income Security Act of 1974, mutual fund statements suddenly struck a chord.
A favorite number bandied about by consumer interest groups during public hearings over the past month has been $17 billion. Small retirement investors such as my wife and I are losing as much as $17 billion a year, we’re told.
That’s money that goes toward intermediaries and industry giants in the form of fees and commissions. So that’s why I decided to remove my wife’s latest mutual funds statements and retrieve one or two prospectuses out of the recycle bin.
I can’t say I much understood the prospectuses, although the pie charts and percentages breaking down the holdings are clear enough.
Much of the fine print in those prospectus documents are generated by lawyers and financial analysts, of course, to be read by other lawyers (mostly) and other financial analysts and compliance officers (mostly).
They are not designed for the retail investor audience. This is why folks like me — with a job, with deadlines, with an 11-year-old daughter in school, with paint peeling on one side of the house, with a mother-in-law who needs special medical attention, with annual car registration renewals, with holidays to celebrate and functions to attend, who’s never been to law school, who’s never had any formal financial education — never read them.
And I can’t say I saw much about fees in these prospectus documents. However, I’m sure there was a sentence or two buried in there about fees and commissions, always expressed as a percentage, never as a hard-dollar figure or as subtraction from total return.
But the mutual fund statement was a different story.
Two years, ago, when my wife’s (very) small business decided to terminate its 401(k) plan because it was too expensive, we transferred the balance to her IRA at Stifel.
Her two advisors were part of a three-man team, reduced to two when her father died suddenly of a stroke four years ago. So it made sense to keep it “all in the family,” which is exactly how many retail investors operate.
Besides the loyalty factor, it made sense since both advisors are managing her mother’s and sister’s assets. (My own retirement assets are held at Vanguard, where I know absolutely no one.)
With her consent, our advisor invested my wife’s IRA money into a diversified group of “open-end” funds.
She’s now the owner of Class C shares of the Dreyfus Opportunistic Midcap Value fund, the Cohen & Steers Real Estate Securities fund, the Columbia Acorn Emerging Markets funds, the Fidelity Advisor New Insights fund, the Gabelli Small Cap Growth fund, the Gabelli Equity Income funds, the Investment Managers Center Coast MLP Focus fund and the MFS Research International fund.
The statement lists the fund symbol, quantities, price, value, unit costs, the original investment and the cumulative returns, unrealized gains and losses, annualized income and estimated yield. This was all well and good, although the statements give me no idea whether my wife paid any fees or commissions for her advisor investing in those funds.
The only part of the statement that relates to costs is the average unit cost/cost basis column, but that has to do with the dividends and capital gains distributions. It has nothing to do with any fees and commissions, if any, paid to her advisor.
If any fees were paid to her advisor, they were not spelled out in the monthly statement. Retail investing amateurs, such as my wife and I, have no reason to assume she paid any fees to an advisor, at least so far as we can tell by the statement.
So this week, out of curiosity, I decided I would run fund comparisons through the Financial Industry Regulatory Authority’s Fund Analyzer tool, an accessible and clear explanation of what funds cost.
I compared three funds: Vanguard’s Total Stock Market Index Fund Admiral Shares, where I have my IRA; as well as the two funds where my wife has a portion of her IRA, Dreyfus Opportunistic Midcap Value Fund Class C and the Gabelli Small Cap Growth Fund Class C shares.
A $10,000 investment with a 5 percent return over a 10-year period would grow to $16,207.71 in the Vanguard fund, $13,443.48 in the Dreyfus fund and $13,164.12 in the Gabelli fund, according to FINRA’s expense analyzer.
Total fees and sales charges were $64.28 for Vanguard, $2,234.35 for Dreyfus and $2,451.63 at Gabelli, the FINRA algorithm revealed. (To be fair, the Vanguard data was current as of Sept. 9, while the Dreyfus data was current as of Sept. 4 and the Gabelli data as of Sept. 5.)
Since the inception of each of the respective funds, Vanguard’s annual return is 5.33 percent, Dreyfus 8.78 percent and Gabelli 8.86 percent. However, the annual operating expenses at Vanguard were 0.05 percent; at Dreyfus, 1.92 percent, and at Gabelli, 2.13 percent.
Certainly, my wife’s advisor gave her suitable investment advice — the Dreyfus fund blew out industry indexes last year. But were his choices in her best interest? I don’t know.
FINRA’s analyzer tells me there are no contingent deferred sales charges, whatever those are (remember, I’m just an amateur), no contingent deferred sales charges if held for more than 12 months at Dreyfus, and no contingent deferred sales charges if held for more than 12 months at Gabelli.
Who benefits from those charges, why and in what amounts, I don’t have a clue. Furthermore, there’s nothing in the documents to help me make sense of this — again, from the perspective of a retail client.
Proponents of the industry at the DOL hearings last month talked about the importance of disclosure. But my wife’s Stifel statements and the FINRA fund analyzer don’t tell me anything about how much was paid to her advisor or to the mutual funds themselves — and this is an age where mutual funds have to disclose that information.
Yes, there are plenty of percentages outlined the Dreyfus Opportunistic Midcap Value C prospectus on Morningstar’s website. Under the “Fees and Expenses” heading, there’s information about shareholder fees for Class A, C, I and Y shares, along with management fees, 12b-1 fees and “load” charges.
“This table describes the fees and expenses that you may pay if you buy and hold shares of the fund,” the Dreyfus prospectus says. “You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in certain funds in the Dreyfus Family of Funds.”
Sorry, folks. This doesn’t do me as a retail investor any good as it’s not in a format that tells me what I really want to know.
What I want to know is how much in dollar terms of the $75,000 of my wife’s IRA went to pay for her advisor and how much the funds — Columbia Acorn, Dreyfus, Gabelli and company — paid him to select the funds that were chosen for her two years ago.
This steering of investors into particular funds is the central issue raised by the debate around the DOL’s conflict of interest rule.
“People don’t have a clue what they are paying for in their mutual fund,” Barbara Roper, director of investor protection with the Consumer Federation of America, told the DOL regulators during hearings on the conflict of interest rules last month.
Under FINRA’s simple three-by-nine table spelling out fees was the chart of redeemed fund values over time after expenses. This is a blue bar representing the Vanguard fund rising steadily over the smaller — but still rising — bars representing the Dreyfus and Gabelli funds.
That’s when, in the middle of a UEFA soccer game on television, I finally turned to my wife as she was preparing for another day on the road for her small business (because isn’t that how retail investors approach their retirement futures — by grabbing bits and pieces of attention in the evening?).
I showed her what I’d done on the laptop and asked her to take a look at the difference in the bars. She let out a hearty laugh.
“Good job, Sunbeam,” she said, recognizing my modest efforts at helping ourselves in the often opaque world of investing.
The nickname was a reference to my first and only direct purchase of stock, $2,000 of Sunbeam, which I bought in the late 1990s when I was taking a finance course. The transaction helped me visualize what it meant to be an investor and what to look for in statements issued by a Wall Street brokerage house.
The company, headed by a former Marine nicknamed Chainsaw Al, filed for bankruptcy in 2001. Still, I felt privileged in that I’d learned enough about stock markets without suffering too much, and that I also had learned the stock market wasn’t for me.
Then my wife hit upon an essential truth, which I suspect is close to how millions of other U.S. retail investors feel about the market: She has no interest in investing and deciding where her money should go.
She just wants her retirement account to grow and to have the funds there for her one day without having to worry about it. Like much of entrepreneurial America, she’s interested in running her small business, not in making retirement account investment decisions.
But perhaps if her mutual fund statement told her how much — in dollar terms — she would have to pay for one fund over another, and how much of that was going to her advisor, I have no doubt she would be making different choices.
On a positive note, my wife encouraged me to ask her financial advisor what kind of fees he collected in her fund selection, which I intend to do. Then I might suggest she insist on her advisor selecting cheaper funds, which she might take me up on.
As of me, I’m all-in with index funds. If the Wall Street-D.C. financial-regulatory complex isn’t going to tell me what I really want to know about how much I’m paying them, why pay them a cent more than you have to?
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at firstname.lastname@example.org.
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