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When a Good Idea Stays the Same
To the average American, investing hard earned money that has some special, earmarked purpose is not the easiest thing in the world. For many it is still a sacrifice to pay oneself first as the investment guides tell you. Even my first book due out in May from McGraw-Hill doesn't vary too far from this suggested notion that taking care of your future is no one elses responsibility but your own. The birth of 401(k) plans and their various brethren made much more intimate and more of a reality for more Americans. But workers who struggle in their jobs with union sponsored plans aren't without sacrifice to help guarantee that retirement does not become a Social Security sponsored end to a career.
But that innocence is shattered now. Or is it? I have a sneaking suspicion that Americans understand the high cost of blind investing and unfortunately may be willing to tolerate it in much the same manner they encourage tax cuts for the upper 1% of wage earning Americans. They aspire. They believe that the company their money keeps will improve their chances in the long run.
The process of buying a mutual fund has not improved from the standpoint of the investor over the years. In spite of regulations that were adopted to disclose more of the behind the scenes activity, uncover more of the cloaked secrecy of the backroom, and ultimately allow the average investor the opportunity to shop and compare before buying with more information than was probably digestible, many of us use either the dart board method, a friend/advisor, or just take a stab at what is either offered in their company's plan or what they've heard. The dart board method is based on luck and some find this effectual in the short term. Using your friend or family member as an advisor can be useful if your friend or family member is someone like me. Not that I would ever advise anyone, Mr. Spitzer or Mr. Donaldson, but I tend to be able to cut through the monetary malarky that one advisor for BAM Securities, Larry Swedroe calls "financial pornography".
Most often the potential mutual fund investor is left to the plans offered by their company, many times by default. Not always the best method and not necessarily in need of some regulatory rule that would drive up fees even further, this investor dutifully relinquishes a portion of their assets in the hopes that someone, some faceless person with their best financial interest in mind, will make that money grow.
And they do. For the most part, mutual funds serve their purpose just as well as they always have. They take money and purchase equities, bonds, or a mix and attempt to spin gold from sweat. Many fund managers understand that goal and achieve it with great integrity and forthright honesty, presumably laboring deep into the night over decisions that will make Mr. and Mrs. America an extra percentage point in returns. And these folks don't mind paying for the service as is evident by the large amount of money being spent on fees each year and not just in funds with loads but in funds that seem to be without.
With the attack from all directions, this previously scandal free institution is still managing to draw record numbers of deposits from investors which has to make all a parties stop and wonder why. Sure their were exoduses from Janus, Putnam and Strong but that was in protest and mainly staged by large pension funds. But the average investor felt as though those pennies lost were almost a cost of doing business with people whom were presumably just a little shady in the first place. It was a sort of financial acquiescence.
As Mr. Spitzer pursues the fund companies for market timing and now portfolio disclosure, all done for the biggest players and as his sometimes trumped counterpart in the S.E.C., Mr. Donaldson chase funds for fees, out in the bread basket of the country, it is just so much posturing. While both these men and their agencies are doing things in the name of truth, honor, and justice, money has never been found in those domains and we all know it.
If mutual funds feel as though they should hold their cards close for fear that something might happen to their carefully acquired positions, disclosing those holdings more often will do little to sway the average investor. We are in it to make money.
Mr. Donaldson is pursuing his own agenda by chasing slotting fees, those dollars paid to brokers and advisors for offering a mutual fund to prospective investors, which, if you think about it, makes your mutual fund even more mutual. The other things on the chairman's wish list and at the heart of what the S.E.C. would like to change is a proposal for hard cut-off times for trading, firmer pricing, and yet still more disclosure. As usual, they are behind the curve. But kudos for trying.
The end result of this will be paid for by us, the investor. Much the same as cod-liver oil, it is, they say for our benefit no matter how distasteful. What should happen might lie in divestiture.
A mutual fund may just operate best as a stand alone entity that is not associated with another group of shareholders. When an investment bank or brokerage owns mutual fund families, the fees that are charged help pay for this overseeing entity are shared. Like any good overlord, those portions of the profit are never quite enough. It would be great if mutual funds could cut loose from having to pay the parent company. In that scenario, a mutual fund might be able to tell an investor that for one flat fee, say 1%, all expenses including the manager's salary would be paid for the mutually exclusive membership in a mutually private club. A three thousand dollar investment over the course of the year would net the fund $30 in operating fees.Then performance, not bonuses based on asset base would rule the industry as competition for dollars would be based on how well you did not how much money you could attract.
Sure the idea is quaint, even provincial and is never likely to happen. But please don't try to tell us that you can change the locations such as Wall Street, where money gathers in great abundance, by turning it into a place that cold hard cash will be harmoniously partnered with truth, honor, and forthrightness. We know better.
Order your copy of Building Wealth in a Paycheck-to-Paycheck World by Paul Petillo. It is packed with safe, proven wealth-building strategies that cover all the major components of a balanced financial plan, including:
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