Dear Mr. Market:

As we close out the first quarter of 2013 investors are intrigued with impressive returns on top of the double-digit results posted for 2012.  Throughout the first quarter mutual funds set records for the amount of money invested in them.  The sad truth is that while investors watch the market continue this upward trend, breaking records in the process, the average investor is not seeing the same results in their accounts. In a recent report published by Goldman Sachs, nearly two thirds of the actively managed mutual funds underperformed the broad markets (S&P 1500 – consisting of large, mid and small cap stocks) last year.  While only a third of the funds beat the market last year the results are even more disappointing in 2011 as 84% of the funds couldn’t beat the broad markets.  While the so-called ‘experts’ have not posted impressive results what is even more shocking is what investors are paying these underperforming managers on a yearly basis.

According to ‘The Motley Fools’ the average actively managed equity fund charges an expense ratio of approximately 1.5%.   If you sit back and really think about this the numbers are eye opening.  If you invested $10,000, into an average actively managed fund, you paid $150 a year every year whether the fund performed well or underperformed (like the majority of them did the last several years).  This is like paying a private tutor to teach your children and being satisfied when they come home with straight “D’s” on their report card the majority of the time.

To take this to another level there are firms like Edward Jones who take these fees to another extreme by selling funds that have an upfront charge (A-shares).   These fees can reach up to 5.75% and are charged when you purchase the fund.  For example if you were to invest $10,000 into one of these funds you are really only investing $9,425 after you pay the fee and then you will also be paying the yearly management fees every year going forward.  You can also come across “B-shares” where you don’t pay the heavy upfront fee, instead you pay it over the next 5 – 7 years that you own the fund and if you sell it prior to that time frame you are hit with a penalty.  Don’t even think of using the term “buy and hold” with these loaded funds it needs to be more of a “buy and forget” simply because of the high fees being paid!  It is almost humorous when you read Edward Jones corporate slogan – “Making Sense of Investing”, maybe it should read, “Making millions of cents off our Investors”.

If you were to take the list of the top 25 mutual funds by assets under management and break down the fees the numbers are alarming.  If you remove all the bond/fixed income funds and index based funds there are 10 equity funds remaining.  Of those remaining funds 7 of them have a front-end load of at least 5.75%!  If you add up the assets under management in these 7 funds it equals $522,000,000,000 (that is billions!!).  The total collected with the 5.75% charge is huge and even the ongoing yearly charge comes out to over $3 billion per year – this is more than many countries GDP around the globe.  Here is the list of funds: American Funds Capital Appreciation A (CAIBX), American Funds Growth Fund A (AGTHX), American Funds Income Fund A (AMECX), American Funds Capital Work A (CWGIX), American Funds Investment Company of America (AIVSX), American Funds Washington A (AWSHX) and American Funds American Balanced A (ABALX).  So what does this tell us and where do we go from here?

Bottom line is there has to be a better way to participate when the markets are moving up and limit your total expenses while exposing your portfolio to better performance.  While many investors and managers are living in the past there are more options available today than ever before.  Here are a few things to consider:

•    “If you can’t beat them …. join them”.  If the average fund can’t beat their benchmark (index) then why not just buy the benchmark?  There are low cost mutual funds and ETF’s (Exchange Traded Funds) available to investors today that charge a fraction of the actively managed mutual funds that we previously discussed.
•    Look for ‘no load’ mutual funds that have low expense ratios.  With investing you don’t necessarily get what you pay for.  Avoid the higher priced options and look at options that are competitively priced and post respectable performance.
•    Revisit your asset allocation.  Based on recent studies over 90% of a portfolios performance is based on allocation and not on stock picking or buying the hot fund of the day.
•    Monitor your expenses associated with your account.  Are you paying account maintenance fees? How much do you pay on every trade? What additional fees are associated with your positions (12b-1, management fees, commissions, etc….)?  Do you have to pay a penalty if you sell a position?
•    If you don’t want to manage your account then find an advisor you can trust.  Make sure that they don’t get paid based on commissions or other investment product fees; over the last several years investors have been moving in droves to fee-only advisors.

Many investors view the stock market as a never ending roller coaster ride and this could not be farther from the truth.  Don’t allow yourself to be taken for a ride; take control and get your investments back on track!  We welcome your thoughts and comments – let us know how we can help!