American Funds: Fact vs. Fiction
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Compare an Optimized Investment Portfolio Comprised of All American Mutual Funds, with Similar Portfolios Made from Other Mutual Funds, ETFs, Index Funds, and Benchmark Indices
We maintain five of the best-fitting Model Portfolios using all American Fund's mutual funds. It's updated monthly and is part of the Model Portfolio software.
Out of their 22 mutual funds (the rest are just share class Duplicates), the American Family of Funds only has eight of the fifteen asset classes used in our regular portfolio models. We then chose the best-fitting American mutual fund to represent each of those eight asset classes.
The purpose is to show how well an investment portfolio comprised of only American Funds is performing compared to generic portfolios with similar stock, bond, and cash holdings. This is AKA benchmarking portfolios.
The American Funds Models are also for commission-based financial advisors that want to do better for their clients than using a few American Funds at random.
We pick on financial advisors using American Funds because it's still the most ubiquitous "legal abuse" in the business. Also because we're always trying to get advisers to move up the financial advisor pyramid.
It was a valid way of doing things back in the Stone Age 80's and early 90's, but that's long over. It worked great with 20th century methods of investing, but so many new products and services have been invented, that it's been obsolete for over a decade.
The American family of mutual funds is the Paris Hilton (or more currently - Kim Kardashian) of investing: It spends the most resources on hype and self-promotion, and is really only famous for being famous. It has no special or unique talents, abilities, attributes, or advantages to speak of; relative to its peers. They were worthy of note back in the 20th century, but not anymore.
From the investor's point of view, there isn't anything American Funds has or does better than any other mutual fund family. So there are no advantages, and several disadvantages in owning them.
But there are huge advantages for Broker Dealers and their sales Reps (and few disadvantages).
So why are they so popular? It's not because of investment performance.
They're popular because they pay big money to be popular. They're also not stingy about sharing the wealth with everyone involved in the selling process. The one thing American Funds excels in, is doing business this "American way."
Which is charging their shareholders high (semi-hidden) fees, and then spending their money on slick advertising, marketing schemes, and kickbacks to Broker Dealers and their financial advisors that sell them (Reps).
They are also snuggly in the back pockets of those who control what investments commission financial planners can sell to their clients – the Broker Dealers (BDs).
They're also probably one of the leaders when it comes to political contributions too. They've known how to "work the system" from all angles for decades.
Who pays for all of this? The shareholders (investors) pay for it via the front-end loads, back-end loads (redemptions fees), and annual 12b-1 fees.
These are things most fund families do, but they excel at enticing Registered Representatives to sell more of their mutual funds than any other mutual fund family.
They don't spend near as much advertising directly to investors as they did back when their returns were better.
When it comes to loads / commissions / sales charges, American Funds are always at the top of the range.
Back when everyone was charging 8.5%, so did they. In the 21st century, the maximum load on a normal mutual fund is 5.75%, which is what American Funds charge.
When it comes to 12b-1 fees, the most normal mutual funds charge for their A-shares in the 21st century is 0.35%. American Funds used to charge 0.30%. The average for most A-share mutual funds is 0.25%. So on average, they used to charge around 20% more in 12b-1 fees than their peers.
They got tired of having to defend themselves about this, so in 2011 they reduced it to 0.24%. Now they tout they charge less than competitors (by a whopping 0.01%).
No matter how you look at it, the cost of ownership for American Funds is about as high as it gets - when it comes to the money that goes to people that don't have anything to do with getting better investment performance (the actual fund managers).
When it comes to compensating those that do the most important actual work, the mutual fund managers, American Funds are skimpy. The average equity mutual fund manager fee is about 1%. The average for American Funds equity managers is about 0.6%.
So American Funds pays the people that add the most value around 30% less than industry average. Would you be motivated to do an excellent job if you were getting paid 30% less than everyone else doing the same job in your industry? Probably not. Could this explain some of their mediocre performance? Probably.
Their ad slogans aimed at financial planners used to say, "I can sleep well at night knowing my clients' money is all in American Funds."
Financial planners ended up losing lots of sleep in 2006 after the press wrote about American Fund's underhanded dealings. They detailed how shareholders were being gouged, and how these ill-gotten fees were going right back into the pockets of the BDs and advisors that sold them.
Many American Funds shareholders called their advisors to complain. Fighting that off consumed most of their time for over a month. So much for sleeping well. But investors went right back to sleep shortly afterwards.
2006 Morningstar comment on American Funds: "It has become clear that brokers at firms such as Edward Jones, Morgan Stanley, and others have sold funds because they have received kickbacks from fund firms to do so. And dozens of fund companies have helped them to create and foster a system in which matching an investor's goals with a particular mutual fund has less to do with the fund's attractiveness and suitability, and more to do with payments from the fund company."
Part of a Business Week article around the same time:
"...nor has American emerged from the fund scandals completely unscathed. It's under investigation by the Securities & Exchange Commission and the California Attorney General's office for allegedly making undisclosed payments to brokerage firms that gave it preferential treatment. American says it did nothing wrong. "We disclosed what was considered an acceptable level at the time," says spokesman Chuck Freadhoff. "The SEC saw our prospectuses and never raised the issue.
American uses that same matter-of-fact logic in its handling of the probes it is facing. Investigators are focusing on two kinds of payments made to brokers. In one, a practice called directed brokerage, the mutual-fund companies' funneled stock trading orders - and fat commissions - to brokerages that sell its funds. Federal and state investigators are also looking into revenue sharing. That's when fund managers rebate a portion of their fees to brokerages, based on how much client money that they put and keep in the fund family. The practice isn't illegal if it's disclosed. But it can encourage brokers to put their clients into funds that rebate the most rather than the ones best suited to their needs."
Translated into English: After more than a half century, it's still a legal good 'ol boy lavish Wall Street party for Broker Dealers, their Reps, and American Funds!
Reps are semi-forced by BD management to be out peddling mostly these types of mediocre products at premium prices.
Then all of those shenanigan profits kick back to everyone else, completing the vicious cycle. It's so entrenched in the system that everyone thinks it's fine, normal, and a model for the way things should be done on Wall Street.
If this were a different industry, then the anti-trust people would be able to do their things to break up the party. In other words, when companies buy up the whole supply chain so they can try to be the monopolist, the anti-trust people usually break it up at some level.
But what is this - a cartel, cabal, racket, a trust, a monopoly, price-fixers, or just a closed-loop party of good 'ol boys scratching each other's backs? It's not clear, and they have all of the gold, and thus make their own rules, so nothing will ever be done.
The technical term for this business model is a "vertical monopoly," created via "vertical integration of the supply chain." Put simply, everyone at every step in the process is part of the whole entity, and shares in the profits.
If you don't think it's a "monopoly," then you have yet to endure a client meeting where the "financial planner" insists the only mutual fund family worth investing in is American Funds. To be a good soldier, they have to tow this standard line, which is doing everything possible to ensure American Funds are somehow sold.
So everyone from the top to the bottom of the mutual fund supply chain - from product creator and maker, packager, managers, compliance, administration, marketing, to sales force - are all working together like a well-oiled machine to rake in these profits.
The only losers are the clients. Their only mistakes were not looking out for themselves by ignoring information like this page, needing to be herded into making a buying decision by a slick salesperson in a nice suit (AKA just being a sheeple led by their shepherd), and thinking "the government" is actually out doing something about these types of abuses.
So on one hand, it's a shame that most everything in this industry is so broken that advisors have to act like parasites desperately trying to survive by living off the fleece of the sheeple.
On the other hand, all it takes is an hour of research to find warning pages like this, and then decide to not fall into those kinds of industry traps. There's also plenty of free information online about how to stop being a sheeple led by shepherds that want to profit from your fleece - and be your own driver (AKA being a DIY investor).
So from the government's point of view - if you're a sheeple with money, then there's little-to-nothing they can do to help you: You decided you needed a shepherd, so you found one, then you let them drive without a map, then you didn't navigate, then you didn't whine when they took Hype Road, you ignored all of warning signs that were well posted, you took the easy road most travelled, and then didn't complain once you woke up and realized you were being driven the wrong way.
In other words, you just "got out the phone book," and found and hired a Broker Deal Rep, thinking they are an actual "financial planner" with adequate training, that knows what they're doing when it comes to money management, and have your best interests at heart.
Then you just agreed with everything that went on during the sales process, signed the forms, wrote your checks, and ended up being an American Funds shareholder.
You baaaa'd like a lost sheeple in the woods, and a hungry wolf in shepherd's clothing heard, and heroically came to your rescue. What you didn't know is where they want to lead you is not out of the woods, it's to their fleecing and mutton-carving stations.
So it's just a matter of time before you end up where you headed off to go. At some point you'll arrive at your destination - which are the fleecing stations at every rest stop. Then at the end of the ride, you'll see the money you needed to pay your bills when you're old and need it the most is just not there. Your wool is gone and now it's cold and you have nothing but skin.
You got fleeced a tiny bit, slowly but surely over time, because you believed the salespersons' pitch about why you should pay the highest load commission to buy bloated index funds. It's just the American Way. You're an American, so this is just what you should do.
Now it's either stay with the program, or spend time researching, thinking, comparing, analyzing, and doing actual hard, boring, and tedious work to change.
If you choose to exit the program, then you'd first have to endure the pain of telling the happy salesperson in a nice suit that you don't want to do what they want you to do, and don't want to buy what they want you to buy.
Then you'll have to endure all of those "comebacks," that they were actually trained to overcome. In our Waddell & Reed training in the late 80's - the vast majority of their "training" was about what to say when the prospect said, "no." They excelled at having it all down to a science.
Free investing tip: When it comes to answering client objections regarding American Funds, they're mostly untrue, backwards, and just wrong. BD Reps are close to the bottom of the financial advisor food chain, so they just do not know what things really are and what they are not. They only know what their superiors told them, what's on sales brochures, and what they learn in the mainstream financial media. So their education in money management is usually just passing the Finra Series 7 exam. As a result, they "know just enough to be dangerous." The data and information needed to draw logical conclusions in this area has just never been loaded into their brains. So all they can do is objurgate, obfuscate, try to get you off track with digressions, and use hyperbole to spew "comebacks to your objections."
If that's not enough, then you may have to endure the same spiel from the Rep's "sales manager." This is because it doesn't look good for them when a client calls shenanigans on Reps under their supervision.
News Flash: These folks are usually just as clueless about how money actually works in the Real World as their rookie Reps. Their office may be bigger, the suit nicer, and everything may be more professional - but you're dealing with just another cog in the same machine (whose sole purpose for existing is to maximize commission incomes), repeating the same memorized comebacks to all of your sound objections.
So your choice is to not rock the boat, or do more work either finding another Broker Dealer Rep (that's going to do the exact same thing), or hire a more expensive fee-only financial planner, or DIY.
The path of least resistance is just to resign to being a sheeple, and filling out American Funds paperwork with the nice suit. Just get this pain over with ASAP, so you can get back to watching Dancing with the Idols, baaa.
Yes, this is you and you know it. It's nothing to be ashamed of. Doing hard work that you don't even know how to begin learning about is just too hard. Just filling out a few forms because the nice suit says this is the best thing to do is too easy.
The majority of everyone else like you is a sheeple, and a large number are an American Funds shareholder too, so you're in good company. Everything is fine, just go back to sleep in the passenger seat, while your shepherd drives you to your destinations.
Next, it would be hard to find a fee-only RIA money manager that still uses American Funds after they've spent all of those resources moving up to the top of the financial planner pyramid.
Peddling American Funds is only something advisers (have to) do when they're at the bottom of the food chain (in other words - a green rookie, apprentice, wanna-be, newbie). Once the need for quick commission bucks stops, because they've graduated out of that failing business model, the need to hard-sell American Funds immediately and permanently goes away too (ditto with having to hard-sell life insurance company products like whole life and annuities).
If and when you live in a world where everything is set up to do the best things you can for your clients (because you have access to the whole universe of mutual funds, and are not limited to just 22 American Funds and the products of a few life insurance companies), then there's zero reason to even think about using American Funds.
In other words, when you know just enough about managing money to be dangerous, you hard-sell American Funds. When you know enough so you're not a menace, then you know there's a bazillion better ways to manage money, so you stop using American Funds.
So the more someone wants you to buy American Funds, the lower they are on the adviser food chain. The higher they are on the food chain, the more you'll hear about American Funds being an inferior option to fund sound investment strategies.
Hiring advisers low on the food chain to manage more than $25,000, is like hiring a rookie paramedic to perform complex open-heart surgery. They'll say they're qualified to do the job (because they want your money), and will be happy to do it, but the final outcome won't be what you expected, or wanted.
Next, their wholesalers (salespeople that travel around trying to get Reps to use American Funds over other mutual fund families) are the best compensated and supported in the business. Working for American Funds is the pinnacle of success dream job for professional mutual fund and life insurance company wholesalers.
Their job is basically to get Reps with the program, and they give out all kinds of expensive meals, entertainment, gifts, and freebies when they "play ball." If they don't play ball, then both them and their sales managers usually hound the Rep until they do - "You're going to show up to this meeting and listen to our good buddy the AF wholesaler whether you like it or not, or you'll be replaced with a good soldier that can get with the program!"
Back in 2000, the AF wholesaler in Phoenix spent over $1,000 in one week of exquisite dining, just trying to convince us to add AFs to one asset class of our models. It took several times of telling him we'd never do that, before he finally buggered off.
There have been reductions in this type of "schmoozing" over the years as regulations continue to tighten abuse. But it still goes on every day.
If American Funds were to put these resources into actual money management, to have more asset classes, more mutual funds, pay their managers better, and to get better long-term performance; then there wouldn't be much reason to complain.
But most of it goes into marketing, sales, and into the pockets of Broker Dealers, wholesalers, and their salespeople. The #1 priority is to keep the vertically-integrated supply chain well-oiled, so the maximum amount of American Funds can be moved and held.
Broker Dealers lead the parade with their cheerleaders waiving American Funds flags, and their Reps usually have no choice but to be one of their floats. To be with the parade means one is rewarded in several ways. When one goes against the parade, they are punished in several ways.
Everybody wants to be part of the herd, with the program, and do what everyone else is doing because they think it's easier, more profitable, and safer. Also, less people in the world they live in are going to give "good soldiers" a hard time if they're going along with the program, like they were trained.
So minor acts of misbehavior, mostly suitability issues, are sometimes ignored. Discretions that may have been prosecuted internally if the Rep used a different family of mutual funds, are sometimes overlooked when compliance knows the bad deed was perpetrated using American Funds. "The Rep used American Funds, so he was just following our orders, so we'll pretend we didn't see this fail, schmooze the client until they're happy and hope they don't file an actual complaint, and everyone will eventually forget all about it."
Next, back in the 20th century, there was a valid reason to use American Funds because they had the best customer service. Most mutual fund purchases were still done through the postal mail directly through the mutual fund company. In the 21st century, it's most always done via discount brokers.
These days, with the cost of technology so low, and American customer service and back-office jobs being outsourced to countries like India, most all mutual fund families have similar customer service.
So the service of a mutual fund family has become irrelevant since large custodians, like Ameritrade, Scottrade, Fidelity, Schwab, and Pershing, now hold and service most investor portfolios.
This means when you want service, you'll get it from either the custodian, the salesperson or their staff, or the Broker Dealer. DIY investors rarely deal directly with AF customer service anymore. So even service is not a reason to buy American Funds these days.
American Funds has not had any real competitive advantage, other than self-perpetuation from the ignorant press and the slickest-looking market brochures, in the 21st century. They haven't been able to do one thing of value better than competing families of mutual funds for a long time - and they more than likely never will again.
From the financial planner's point of view, that's working on a commission-basis, there are several big advantages in using only American Funds.
First there's the "sales contest." Broker Dealers give all kinds of rewards and freebies to Reps that are with the program and sell the most. In some offices, there's even competition charts updated daily, showing who is currently winning. The big prize is usually the lavish exotic winter cruise vacation in a tropical paradise.
They call them "conferences," and it's where BD and wholesalers give out praise, applause, and prizes to the top sellers, in a Hollywood Oscars-like setting. And don't forget the never-ending sales pitch about how to sell even more next year!
Advisors that use more than one mutual fund family, because they want better investment performance for their clients, are usually left out of these parties. This is because those product sales credits don't count toward the conferences as much as AFs. For example, if you sold $100k of AFs, you may get 100 brownie points. But you may only get 10 conference brownies if you sold $100k of Vanguard index funds instead.
The flip side of the sales contest is sales quotas. Financial consultants working on a commission basis have to drum up a minimum amount of brownie points annually, or they're fired. American Funds usually pay the most points per dollar of sale, just like the conference brownies. So they're naturally favored by advisors fighting to survive (because of "low production").
Next, the Broker Dealer is usually more informed, supportive, helpful, and efficient in maintaining a supply of American Funds prospectus, reports, paperwork, and marketing brochures.
When an advisor recommends a mutual fund to a prospect (that pays a commission), they have to give them the current prospectus (and the latest quarterly or annual report) on the spot. These are updated frequently, so keeping the current version on hand for every mutual fund used becomes a chore.
American Funds really only has 22 mutual funds. Most financial planners only use seven or less of those. So limiting their operations to just a few or several mutual funds from one fund family just makes their life easier.
Also Reps only have to learn how to fill out one mutual fund family's paperwork, memorize only several mutual fund names, and sell from one set of sales brochures.
If Reps had to stock their shelves with paperwork from every mutual fund family they use, it would just be "too much work."
That's right, one of the biggest reasons why American Funds are the best solution to everything, and why investors realize mediocre investment performance, is because their advisors are just too lame to do a couple of extra hours of mundane work a month! To help, we created a system to help maintain prospecti.
In order to get good investment performance for their clients, advisors would first have to stop overselling American Funds. This is a habit just as hard to break as sweets, smokes, and beer.
Then they would have to learn how to pick better mutual funds (an insurmountable task for the average commission-based financial planner), spend ~$1,000 a year on the software to do the work, spend several hours a month doing the work, and then a few hours maintaining the paperwork farm.
Why do all of that extra hard work preparing to actually do your primary job function, when American Funds are "good enough" and clients' are too ignorant to know if they're getting decent performance or not anyway?
After all, client's aren't sticking with the advisor because they're getting great performance, they're clueless and don't know any better. They're loyal because the advisor and staff are so friendly, nice, helpful, easy to get along with, make everything easy, and are so trustworthy.
Doing the "right things" would just mean working more and getting paid less. Since few are complaining, and the shepherd overseers are happy, why would anyone want to do that? Don't rock the boat and stay the course.
So the reasons why American Funds continue their lock on the BDs is because they, their clients, and their Reps just don't know any better; they don't know how to properly compare investment performance, are lazy, it's still is the best way to maximize income and do the least work, habit, it's the path of least resistance that's been working great for over three decades, armies of wholesalers are out schmoozing via free expensive meals and passing out cool stuff daily, then there's the conferences prizes and rewards, and last but never least, regulators haven't gotten around to doing anything about these types of gray-area abuses yet.
American Funds makes life wonderful, the shepherds are well fed, all of the systems are already set up and optimized, and everyone is one big happy family because their backs never itch, so why change?
Next, compared to most all other types of investments and investing, most mutual funds have little-to-no conflicts of interest. This is because the shareholder, you, are usually the only shareholders - or owners of the company.
Some mutual fund families have grown too big, and thus have an additional higher-priority layer of shareholder, like American Funds. So they have interests that are not aligned with yours (AKA a conflict of interest). The #1 priority of any corporation is to ensure their owners and primary creditors are adequately fed first.
The primary owners of the overall company are not you, the American Funds shareholder. The bottom line owners, that need to have their financial needs met before yours, are a bunch of rich fat cats living the good life all warm and sunny in LA: "American Funds Distributors, Inc. is a privately-held company that provides broker dealer services. American Funds Distributors, Inc. headquarters are located in Los Angeles, California."
These are shareholders of the mutual fund family, so they care much more about how much money the mutual funds (or life products) make for the whole family (or life company), and much less about how much each individual mutual fund (child) makes for the investor.
With smaller mutual fund families, this layer of shareholder is usually not even there. You, the mutual fund shareholder, is where the bucks stop.
So larger fund families are prone to all sorts of shenanigans (like American Funds being extremely over-bloated), that are not in the interests of the mutual fund shareholder. Smaller fund families don't play these shenanigans because they don't even have shareholders at the fund family level at all.
Now let's put a spotlight on the biggest misconception: That American Funds have any form of superior investment performance.
Most of American Fund's 22 mutual funds are just average when investment performance is properly compared with similar mutual funds and proper benchmark indices.
No matter how you look at it, they don't suck and they're not great. They're just average, mediocre, or in the middle of the pack. About a quarter are good, half are okay, and a quarter of them are 'bad.' These numbers constantly change for better and worse.
None of their mutual funds are super-star performers. Even Morningstar's flawed Star Rating system ranks only about 10% of them (two to three) with five stars at any given time. Every once in a while, they get lucky and have great performance in the short run, like a few months in a row here and there. Then they revert back to being mediocre. In Q1 '13, no AFs had five stars.
American Funds rarely show up in our Mutual fund screening process. They don't make it through several primary filters, just because of mediocre performance alone. There were a few years in the 20th century when EuroPacific Growth at least showed up in the screens, but since then, too few make it through. This is the bottom line to us - if they were good enough to pass our screens, then there would be no need to whine.
So you can see recent examples, there are charts with sorting screens comparing some of their funds with indexes pasted into this Word document.
Next, American Funds have never been any good at being pure to asset classes.
For example, most of the time, American Growth Fund holds around half of the types of securities that its name leads one to believe it holds (large-cap growth). This should be over 90% (if that was the objective in the prospectus, which it is not).
You'd need to read the prospectus, use expensive software, or do research online, to know that it's stated fund objective is not large-cap growth (it's just "generic growth"). There's nothing good about this, because it opens the door to all kinds of shenanigans.
Generic mutual fund objectives translated into English: "We're going to trade most anything that looks like we can profit from, and we don't care if our allocation to asset classes other than large-cap growth goes from 25% to 50% overnight. Nor do we care that our exposure to large-cap growth could be less than 50%. Asset allocation is the shareholders' and their advisors' problems. All we care about are the gross returns."
There's not much wrong with this, as it is disclosed, but when your mutual funds can significantly change asset class weightings at random, it makes using asset allocation techniques much less effective. Another disadvantage of generic objectives, is it can change its allocation away from growth to value at any time.
This means investors trying to use intelligent asset allocation strategies to reduce risk, will have their efforts thwarted by mutual fund managers buying too much of the types of stocks they shouldn't be.
The point is you can't rebalance to compensate, because what they actually hold changes secretly and significantly at random. Even if you did know, then your rebalancing range triggers would go off daily or weekly. So even if you have access to this secret information on a timely basis, it would impractical to compensate for weighting swings of these sizes and frequencies.
So you have no choice but to accept the higher risks associated with having your allocation being in constant chaos. There's nothing good about any of this.
Then, news flash: every data source that shows mutual fund holdings, like Morningstar, is at least one month old. Then mutual funds don't like to disclose their true holdings to data sources, because that's their top secret to hide from competitors. They're also paranoid someone will duplicate the fund. So even fresh data directly from the fund company is always significantly wrong... on purpose.
To minimize these problems, all you can do is only use mutual funds that state in their prospectus objective, which asset class(es) they're investing in.
It's hard enough keeping portfolios in balance with normal mutual funds that behave themselves, just because of market moves. So it's just not possible with mutual funds like American Funds; that are all about abusing these kinds of shenanigans for the fund family's profit.
All of this increases risk, which results in losing more money than expected when markets go down.
More importantly, it means when large-cap growth stocks go up, this fund will lag the rest of the pack.
Lack of asset class purity is never a good thing, unless you can only afford to own less than five mutual funds. This is why it's a critical primary part of our mutual fund screening process.
Next, if you cut them some slack, you could say they have 14 asset classes. But only around nine are actual true asset classes. The rest of the fund objectives are a mixed randomly-changing generic jumble that could mean anything (e.g., world stock, world allocation, moderate allocation, balanced, and just income).
If you made a ratio of AUM (assets under management) and divided that by eight or even 14 asset classes, then American Funds probably has the highest ratio (the least amount of asset classes needed to diversify a portfolio, relative to how much money they manage).
In contrast, most "good" mutual fund families, like T. Rowe Price, Oppenhiemer, Fidelity, Vanguard, the list goes on... have over three dozen actual asset classes to invest in (with similar to less AUMs).
Why don't they have more than a dozen asset classes? The best guess is it would just confuse BD Reps more than they already are. They seldom know how to construct well-balanced investment portfolios with less than a dozen asset classes as it is. Adding more would just make the machine sputter, as Reps would have to stop and "waste time," thinking about which funds to use and how much. The less choices, the easier it is for Reps to pick a few ad hoc and then get onto the important stuff - getting checks and paperwork filled out.
The next elephant in the room - Bloating: Most of their mutual funds have had too much money invested into them for too long. This is because they were recommended over everything else by armies of BD Reps over the last 25+ years.
Some say, "American Funds are more conservative." They're mistaking the lack of their mutual funds going up more than the markets, and down about the same, as having a superior investment strategy that will result in losing less money in bad markets.
As you can see on the charts, this isn't because of some superior conservative investment strategy. It's from being so bloated that their funds act more like index funds than regular mutual funds.
This may save investors from losing a little here and there in bear markets, but they're also going to miss out on profits during bull markets.
These mutual funds have so much money in them that they have to hold a little of most every stock traded. This is known as being "bloated." The long-term result is investment performance that just matches the markets / index / asset class.
Why get index fund results when you can just buy true no-load Vanguard index funds, that don't randomly stray from their asset classes, and just say no to paying high commissions and 12b-1 fees?
All of AFs other enormous mutual funds have the same problems, and as a result, a high percentage are in the bottom half when performance is compared correctly to similar mutual funds and their appropriate benchmark index. This means you have a 50 / 50 chance of just matching an index, if you’re lucky.
Their performance gets worse every year as this bloating is continually compounded with too much new money.
New money coming in has to be invested into something, because they can't hold 15% in cash, or their performance would be even worse. They also can't just buy more of the "good stocks" because they would have to file with the SEC if they held more than 5% of a corporation's outstanding stock.
Another problem with bloating is their funds have to hold too much in cash, because they can't find enough new stocks to buy - they already own too much of most everything already.
On average, around three of their 22 funds holds ~10% in cash. Most are in the 5% to 10% range. You're not paying fund managers to put your money in the bank, you're paying them to buy and sell. You hold cash (money market) in your account so you can use it when needed, so you don't want more than a couple percent held inside your mutual funds (5% tops).
Even if their most bloated mutual funds magically were cut in size by half, they would still be enormously bloated. They would have to shrink that down to under $20 billion to not have to whine about bloating.
Next, you also can't be well diversified by owning several different American Funds, because most have to own the same stocks (because of bloating).
So if you buy AMCAP, Growth Fund of America, and New Economy thinking you’re safer because all of your eggs are divvied up between different baskets, then you are mistaken. Look at the holdings and you’ll see too much of the same stocks. The same if you held American Mutual, ICA, and Washing Mutual.
The right thing for American Funds to do is to close bloated load funds to new investors. They should have done this around 1995.
But this is a mutual fund family that's only about, "Show me the money today," so they'll never do that.
Just the fact that they don't close their bloated mutual funds is proof that they care more about maximizing their income at the family level, than getting above average investment performance for their fund shareholders.
Their strategy of concentrating on high-growth of assets under management, and constantly collecting even more assets is still going strong.
Here's another example of things they spend fund shareholder's money on: We went to a focus group in 2000 sponsored by people trying to find out how investment advisors select mutual funds. The invitation we received in the mail looked like we were doing the industry some big academic favor. After wining and dining us sparing no expense, fishing every detail out of us - like all of the things it would take for a fund company to get more of our assets; they gave us $100 and then told us it was conducted by American Funds. Deceptions like this are proof that the color of your hat is black.
Next, when a "financial planner" puts fancy sales brochures in front of people new to investing, this and what the salesperson says, are usually all they have to go by. They also think the "government" is keeping an eye on loaded mutual fund salespeople.
Investors don't know how to find important information like this. Even if they did, they probably wouldn't understand it. If they did understand it, and contacted their salesperson, all they'd get is, "I'm the professional here, you're just fine so don't worry, be happy and go back to sleep. You're investing in America - your mutual funds have had America in their name since the beginning of time! How can you go wrong with America?" Then blah blah blah about how American Funds are the best thing since sliced bread.
So once investors' place their trust into the advisor's recommendations, commissions are deducted, the deal is done, and the investor is stuck.
Then in non-qualified accounts, there are taxes to pay if American Funds are sold to buy better mutual funds (if there's a profit).
So you're locked in because you'd need to break up with the Rep that sold them to you, you can't get the commissions paid back, you'd need to do work selling them and buying something else - or finding and hiring a new money manager, and then there'd be taxes to pay if you sold at a profit in non-qualified accounts.
All of these things combined make it so few people that wake up and smell reality actually do anything about it.
Investing Tax Tip: There are tax advantages when you sell mutual funds at a loss within the first 90 days or so. Yes, the front-end load counts as part of this loss.
So if it's been a month since you got sold American Funds, and they're all currently at a loss (mostly because of the sales commission), then just sell them all ASAP at a loss. Then this capital loss carries forward and is offset by future capital gains. This saves you some taxes.
So your initial reluctance to sell them right away, because you don't want to accept the failure of selling at a loss just because you paid a high commission is wrong, unfounded, and backwards. This is the best time to bail (when your funds' NAV is below what you paid for it).
Just do this ASAP: Call your Rep and instruct them to sell all of the American Funds at a loss, locking in your capital loss tax breaks.
Then instruct your Rep to buy a similar allocation of Vanguard Index funds. Do not ask them - just tell them this is what your orders are.
So if you have AFs that total up to being 50% U.S. equity, 15% international, and 35% in bond funds; then buy 50% of Vanguard Total Stock Market Index (VTSMX), 15% of Vanguard Total International Stock Market Index Investor (VGTSX), and 35% Vanguard Total Bond Market Index Investor (VBMFX).
Don't worry about getting this perfect, as your Rep most than likely had no clue how to use asset allocation strategies when they sold you AFs in the first place. So don't make a fuss trying to duplicate an allocation that either wasn't done at all, or wasn't done well in the first place. The point is just to not lose money during the firing and hiring process, just because the markets went up during the time your AFs sales are in cash / money market. So now's the time to take a stab at what allocation you think is better, then go with that until your account(s) settle with your new custodian.
Set up a discount brokerage account (this takes less than an hour online), so you can DIY, or find and hire an actual fee-only RIA money manager.
Then close your account(s) with that BD Rep, transferring them to either your DIY account or a real money manager. The most pragmatic thing to do is totally terminate your relationship with that office - all the way down to the phone calls and junk mail. This way you won't be reminded of your fail in the future.
Then punish yourself for being a sheeple, promise to never let that happen again, then just get on with your life - as a people and not a sheeple.
Yes this is all very painful. You first have to capitulate that you failed (by realizing you were a sheeple, being misled into a bad purchase by a Black Hat shepherd).
Then you don't want to sell, because you're selling at a loss, because of the front-end sales charge, which is also a fail you don't want to admit to yourself.
Then because you're mad at yourself for failing, your instinct is to just do nothing and hope for the best. If you ignore the problem, then it will just go away, right? Not with this deal - these problems are ongoing. The longer you fail to fix them, the worse your situation becomes.
So use logic, not emotion, to change this fail into a win. Ignore your feelings so you can do something good and productive with this. Learn, change, grow, prosper.
First, you learned, so you won't do that again. Next, the money you feel bad about "wasting" (the front-end loads) is gone forever anyway. There's nothing anyone can do to get this money back. All you can do to salvage the situation now is bail and grow by investing more wisely.
Look at that loss as dodging the sheers. This first fleecing (thinking the Rep was an actual professional money manager and then paying the front-end loads) came at you when you were naive and unprepared. So a predator fleeced you just because you looked like, talked like, and acted like prey (baaa). This is just how life is set up to work (the weak are meat and the strong must eat), so it's completely normal, and not your fault.
Most everything in the financial sector of the U.S. is a fail, unless you're a Wall Street fat cat, then everything is just fine. You thought life was fair, and these things shouldn't happen anymore in America, so you didn't expect to fall prey to a predator in a nice suit so easily. Just chalk it up to, "Fool me once, shame on you."
Now it's your choice to have things stay like this and let the fleecing continue for decades to come. Or you can stop being a sheeple and start being a people, so you'll never get fleeced again. If you choose to do nothing then, "Fool me twice, shame on me."
If you're feeling bad because the sales charges were the money you spent in return for "financial advice," and it will now be wasted if you fire your "adviser;" then ask yourself - what was the quality of advice received in return for the commissions you've paid?
You got misled by a Black Hat shepherd that's a product of a broken obsolete Black Hat business model, that's slowly fading into oblivion anyway.
What's their solution going to be if you whine to them about American Funds? They're going to try to sell you life insurance company products - like whole life insurance and annuities. That's the gist of what most BD Reps want, and can, do for you. That's the core of the BD business model. It's not a mistake, you're not misunderstanding, it's just a major economic fail.
If you go to a chiropractor they're going to want to crack. If you go to a pharmacy they're going to want to sell drugs. If you go to a surgeon they're going to want to cut. If you go to a stockbroker, they're going to want to sell you stocks. If you go to an insurance agent, they're going to want to sell you insurance. If you go to a BD Rep they're going to want to make commissions by selling you American Funds, whole life insurance, and annuities. That's just what they want to do, because that's all they can do, and nothing can or will ever change that. It's just that simple. It's a basic life fail that can't be fixed, so just get over it and move on.
Just don't do that anymore. The investing business model of the future is hiring a fee-only Registered Investment Advisor (AKA RIA), and/or doing it all yourself.
So all future advice from your Rep is going to be of the same "low quality." It's the same deal with most other BD Reps too - Black Hat. So if you fired the one that sold you AFs, and then went down the street to an office of different BD Reps, it's going to be the exact same song and dance. In other words, they all do the same things, because that's how their business models are set up.
Even if they wanted to, these tigers are not able to change their stripes, and all of a sudden give you quality financial planning advice. The BD business model is just not set up for that. It's set up to rake in commissions from easy short-term transactions, not foster long-term professional relationships with solid investment performance and accurate retirement forecasts.
If you want quality long-term financial and investment advice, then you'll need to pay for it directly - by paying fees to a fee-only RIA. Or just learn to DIY.
So you have the opportunity to bail, and get a tax break, if you do it right after you bought and you're selling at a loss because of the front-end loads. Don't miss it!
Next, use the fail being fresh in your mind to motivate yourself to change. Either hire a fee-only RIA, or learn how to manage your own money. When you do that, then you'll be buying a fresh set of better mutual funds to replace your Vanguard index funds after your new account is set up and ready to trade.
You'll also have a better chance of your mutual funds outperforming its index (because they won't be bloated), your portfolio's allocation can now stay in balance; and last but never least, your investments will be able to provide adequate retirement income, without depleting too early via share redemptions.
This primary function of an investment portfolio (using mutual fund dividend and capital gains yields to generate retirement paychecks) is not possible with American Funds, because they don't have the asset classes needed to obtain a high stable income stream. You can get a low stable income stream from their three to six bond funds, and that's it.
Their severe lack of income-producing asset classes means you will probably be redeeming shares to get the money needed to pay for living expenses during retirement. Shares do not magically grow back after they're sold, so eventually you'll run out of shares (all fleeced, no more money).
Our Conservative American Funds Model has yet to yield over 2%, and our CHIM has yet to yield under 4%. That's all the bottom line you should need if you're investing for future retirement income.
Here's text copied from the Model Portfolios page about the differences in using American Funds and our Conservative High Income Model (CHIM):
The last 12-months Fee-Based CHIM's income yield was 6.7% and the total return was 20.0%. These are hypothetical because they don't account for past fund switches, rebalancings, or allocation changes.
This investing model is very different than the regular models because its goal is to maximize income yield, not beat any benchmark index. So the history of returns have are not maintained. You can see the YTD and last three year returns on the investing model demo.
Here's an estimate of how these numbers work out: If you'd invested $100 one-year ago at the beginning of last month, and the total return was 20% and the yield was 6.7%, then now you'd have ~$6.70 in cash to spend (in your money market / cash / sweep account), and in addition to that, the fund would still be worth ~$113.30 (because no shares needed to be sold to get the income yield).
This means you could sell all or any amount of the ~$113.30 at any time for any reason. This is something you CANNOT do with CDs, real estate, annuitized annuities, limited partnerships, large individual bonds, private stock and options, gold, etc.
Investors are also loathe to sell stocks and mutual funds when they're down, so you usually "cannot do that" either. So right off the bat, the CHIM's high liquidity may literally save your life (if you really really need your money).
Then the number of mutual fund shares you owned would always be the same, and so you'd have ~$6.70 of income to report on your taxes (assuming the mutual funds were not in a Roth IRA). How much in taxes would vary as the composition of dividends, capital gains, and interest income would be random based on what the funds actually distributed.
This may not look like much, but on average it's twice the yield on all of our other investing models (and even more compared to what most everyone else is getting).
This is because it's another unique invention from T4$, so nobody else has this. It takes five to ten years for investors to catch on and start copying our work. For example, all Robo-adviser sites are basically offering the exact same things as our Models (so it took them from '98 to '14 to copy and automate our Models (they wanted to do it much sooner, but the technology wasn't available yet). Some were even our customers that tried to get us to join their Robo adventures around 2012. The only difference is that Robos charge rock-bottom prices for their cookie-cutting one-size-fits-all non-personalized services running on insecure cloud servers. Whereas with ours, it's 100% secure mostly all custom work (where the investor can have input on how their money is invested).
So if you look at the yields of everyone else's Models, including the Robos, then you'll see that cloud-based automation still has years to go before it catches up with live money managers. And if they do copy the CHIM, then we'll sue big time for copyright infringement.
So the bottom line between our seminal Investment Models, and copycat Robo Models, are the returns and the fees. Keep checking the returns on these pages, because this is one area where fintech won't win (because our returns will most always be better, even after our 1% annual AUM fees for live clients with live accounts with our CA RIA). Regardless of how fintech progresses, one can never escape the mundane State of Humanity - "There ain't no free lunch, and in one way or another, you get what you pay for!"
There's more about Robos below the table of returns.
The most important thing is this (if you set it up and manage it correctly): The number of mutual fund shares you owned will most always be the same after you get paid your retirement income paycheck, as it was before you got paid!
Good luck trying to find something that performs this function, with these returns and low risk, for this price!
Then in Jan '17, the SEC started saying they're going to put more resources into regulating Robos too. So the free lunch may be coming to an end sooner than you think. what this will do
For example, the yield on the optimized Conservative American Funds Model was only ~1.4% and the last 12-months return was ~1.6% (and this does not account for the sales loads).
So if you had a million bucks in the Conservative American Funds Model, your monthly retirement paycheck, from just yield, would only be ~$1,000.
With the Fee-Based CHIM, it would have been ~$6,167.
So this resulted in having ~517% more retirement paycheck compared to investing the obsolete 80's "American way."
So in order to receive the
So in order to receive the same amount of retirement check with American Funds, you'd have to constantly sell shares. This will probably make your nest egg run out before you pass away.
With the CHIM, you probably wouldn't need to sell shares to get a decent yield and retirement paycheck; so when you pass away, there's a better chance that you'd still have around your original million bucks intact.
Even worse, if you gave your million dollar nest egg to a life insurance company in exchange for the usual plain vanilla fixed annuity, not only would you probably realize even less retirement income than with American Funds (~10% less), it wouldn't even keep up with cost of living inflation at all (unless you paid the insurance premiums for an inflation rider, then you'd get about 15% less paycheck than by using American Funds).
Then when you pass away, your heirs would receive nada bupkiss el zilcho (unless you paid the insurance premium to provide a death benefit, then you'd get about 15% less paycheck than with American Funds).
So if you combine the cost of these two needed insurance contracts to insure for these two huge risks, which are 100% certain to happen, you're making around 20% to 25% less spendable income in a fixed annuity than with American Funds.
So this adds up to be around 70% to 80% less retirement income paycheck than the CHIM would probably provide over your retirement years.
After you've sold your AFs and invested more wisely, then there's no more fleecing, the Black Hats lost, and you and the White Hats won. This is how things are very slowly moving over time anyway.
People have been pointing all of this out for years, so these are not new complaints.
There's only one thing you as a financial advisor can do about this, and that's to grow new brain cells, learn how to better manage money, and then stop selling them.
As an investor, the only thing you can do (other than not buy them) is to sell them and buy better mutual funds (and/or replace your investment advisor ASAP).
The reason few investors know about the mediocre performance, is because nobody has ever listed their problems, or compared them properly, and then posted the results in a place that stays put before.
This information is in the media all the time, but only for a week and then it's gone. The only places you'll see the performance of an optimized American Funds portfolio properly compared on a monthly basis is on the previous link, and charts here.
Everyone that was sold American Funds by a financial salesperson should do their homework with respect to performance, fees, commissions, asset class purity, and the ability to generate retirement income without selling large numbers of shares.
These days, there is not one reason why American Funds are superior to their competition (which are now Vanguard index funds because of the bloating). The more you do your homework, the more you'll reach the same conclusions.
Then you should question your financial advisor on why you were sold such mediocre-performing mutual funds, which lack the asset classes needed to lower risk through diversification, and have such high costs of ownership.
The truth from your commission-based financial advisor is, "That's how me and my Broker Dealer make the most money from you! Plus I don't know how to do the research to find better-performing mutual funds, the only training I've had in money management was taking the Finra Series 7 exam. My Broker Dealer and wholesaler and sales manager all very much want me to use them, I'm too lazy to maintain a supply of mutual fund prospecti or learn the paperwork for more than one mutual fund family, and they have the fanciest sales brochures to help me close the most deals. My life is just fine being a good soldier, so why would I want to change?"
It's hard to teach old dogs new tricks, so the self-perpetuating myth about American Funds being superior will be around for a while longer.
If you don't believe any or all of this is true, then find a seasoned veteran financial advisor that started out as a Rep in the Broker Dealer commission-based world, and then moved up the financial advisor food chain to be a fee-only money manager. Let them tell you their stories about their experiences working their way up the ropes. That will wake you up to reality for sure.
If you're in a tax-qualified retirement plan (IRA), then you can sell them all and invest the money into better performing investments, and escape all of this forever, without paying any capital gains taxes or sales loads (AKA an IRA Rollover).
Another opinion is that no matter what mutual funds you buy after selling all of your American Funds, it would be hard to do much worse than keeping them (assuming the investment strategy stays the same, or gets better, and all you're doing is replacing the funding vehicles).
Finally, it's the 21st century - so just say no to American Funds. You can and it's easy - just ignore (and fire) the whiny salesperson ASAP!
If there's no salesperson anymore (for the usual reasons like, "they're no longer with our firm"), then just open an account with a discount broker, sell them all, and try to do better yourself. Most discount brokerages will even do all of your paperwork for free these days.
American Funds is an obsolete 20th century way to invest. You don't use a land-line phone dial-up modem to connect to AOL to access the Internet anymore, do you? Of course not, it hasn't been the Stone Age for over a decade. Nobody does that anymore.
It's the exact same concept. There are too many better ways to invest to count these days - either by doing it yourself, or by hiring a fee-only or Fee-Based money manager.
A funny source-less anecdote: "Take a population of our species and give it no reproductive education, and you'll get teenage mothers and STDs. Take a population and give it no financial education in school, and you'll get American funds. What that's saying is... If you think education is expensive...."
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