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These Mutual Fund Picks are Part of a Do-it-Yourself Money Management System for Individual Investors, and the Turnkey Investment Portfolio Building System for Financial Advisors

You can hire us to manage your money, and/or advisers can hire us to manage their clients money, using our Model Portfolios and/or Asset Allocation Software for a flat $250 a month fee.

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Mutual Fund Analysis, Screening, Recommendations, General Information, and Free Tips

First some basic mutual fund information:

There are two kinds of mutual funds, open-ended and closed-ended.

Closed-end mutual funds issue a fixed number of shares, are usually priced by the markets at a discount or premium to net asset value, and trade normally when the markets are open.

This is just like an ETF, which is basically just a version 2 reboot of closed-end funds.

We don't work with closed-end funds because there's no way to screen them to get any predictive value because of the large and random premiums and discounts, which are due mostly to thin trading.

Closed-end mutual funds "failed to launch," because of lack of interest and the random unjustifiable premiums and discounts.

Open-end mutual funds issue new shares as new money comes in, and do not trade on exchanges. You can buy and sell (redeem) shares of open-end mutual funds directly through the mutual fund company, or through a broker.

The big difference is they are only priced at the end of each trading day. After the markets close, prices are tabulated on all of mutual fund's underlying securities, and then a total is calculated. After internal fund cash flows, realized capital gains, dividends, new fund inflows net redemptions, etc., are accounted for, this is then NAV.

Net asset value, or NAV, is just the term for the current share price.

This takes time, so if you made a trade at any time during the day, you won't know what price you actually executed at for sometimes hours after the close.

The term mutual fund generally refers to open-ended mutual funds, and is the subject of this page.

information on mutual fund investing.

Mutual funds are one of humanity's greatest inventions. For individual investors, they are by far the best way to invest. If you know how to avoid the bad ones, then:

• There's usually a Mutual fund that specializes in most everything investors want,
• they're efficient,
• are inexpensive,
• easy to invest in,
• are as liquid as you can get (other than being priced at the end of the day),
• are easy to sell, and you can withdraw small odd dollar amounts anytime,
• the no-load versions don't cost anything to buy or sell (unlike ETFs),
• it doesn't cost a lot to get started, nor to add new investments,
• there's only a minimum initial investment once, then you can usually add amounts as little as $1,
• data about them are readily available and sufficient to make decisions,
• they disclose everything and give you all of the information you need,
• are highly regulated,
• usually behave as they're supposed to (within a reasonable range),
• they lower risk by providing diversification by owning many securities,
• one can invest in most of them without paying a financial advisor,
• they work great in all forms of tax-qualified retirement plans (IRAs & 401ks),
• and they allow you to make money while not wasting resources on the futile tasks of timing markets and picking stocks.

We offer a monthly-updated Excel spreadsheet with 100+ mutual fund picks for investors and financial advisors.

20 are ETFs and over a dozen more are only available via the Model Portfolios.

If you get the Model Portfolios with it, then it shows the history of changes going back to 1999 or 2003 (and most switches are explained). If you get just the mutual fund picks, or get just the picks with the Asset Allocation Software, then this is not included. Then you'd just get the current Month's mutual fund picks, which only have 78 mutual fund suggestions and 22 ETF selections.

There is an ETF and mutual fund recommendation for each of the 22 asset classes we work with, times five ways of managing money: Fee-Based, load mutual funds, no-load mutual funds, index funds (only 15 here, and then because of yet another Morningstar failure, and lack of interest, Index funds are not screened and Index Fund Models are not maintained anymore).

Then there are dozens of unique picks to fund our Conservative High-income Models (CHIMs), and the four low-minimum initial purchase models (these only come with the Investing Models).

We only screen open-end mutual funds, ETFs, and Index funds. There are no mutual funds with back-end redemption fees (B-shares), C-shares, Load Waived funds, nor closed-end mutual funds. All mutual funds selected have an initial purchase minimum of $5,000 or less in non-qualified accounts (initial minimums are usually a lot less in tax-qualified accounts, like IRAs).

If you can't buy a mutual fund selection in your investment account, or have trouble fully funding a model for whatever reason, then you can get replacement suggestions until you can (because it comes with a minimum of e-mail support).

You can get the mutual fund picks separately, or they come with both the Model Portfolios and/or Comprehensive Asset Allocating Software. You can get them just once or subscribe to receive them monthly for one-year. They're updated monthly, and are usually e-mailed out to subscribers around the third business day of the month.

We buy and use Morningstar as the mutual fund screening software. So other than that, we don't have anything to do with them - so please don't call asking about Morningstar.

About the Mutual Fund Recommendations for Advisers

The Fee-Based mutual fund picks are only for professional advisors that can buy loaded funds (A-shares) at NAV in managed accounts. In other words, the front-end loads are waived so investors don't pay them.

Advisors then charge their clients fees (usually as a percentage of assets under management, or AUM).

Fee-only advisors without access to Fee-Based platforms can use the no-load fund picks, ETFs, or index funds.

Advisors working on a commission-basis would use the load fund picks or ETF suggestions.

Now you can forget about wasting time trying to choose mutual funds. You need to spend your time looking for new prospects, managing relationships, and building your practice.

Most advisers would be able to get a new client every week with the time they saved by not having to baby-sit mutual funds. So for hardly any money, you'd get both better fund picks and more time to focus on what's really important.

Plus you'll make more money if you get paid via fees or 12b-1 fees, because the more your clients' investments grow, the more money you'll make.

You can also forget about taking bad advice from people full of conflicts of interest peddling their pet mutual fund picks (your BD, branch manager, their research departments, fund wholesalers, software vendors, fellow advisors, the media, and generic advertising).

All most of them care about is making more money from you. Compare their investment recommendations to how well our selections have performed here.

We are totally free of all conflicts of interest, and all we care about is performance for our customers.

These mutual fund selections allow you to easily stop doing business the 20th century way. Everyone will be better off if you just broke the old habit of using American Funds.

Financial professionals don't need a Finra Series 7 license to manage money for clients using our investment software systems. A Series 6 is all that's required if you only recommend mutual funds.

Advisors can use our mutual fund advice to justify trading to compliance, because it has reasons for the switches. Once they see what you're doing, they'll leave you alone, because compliance prefers low-turnover asset allocation using mutual funds (over the myriad of other harebrained investment strategies everyone else uses).

On average, one mutual fund changes per Month, so you won't get unwanted attention about churning to drum up commissions. Once they see you're fact finding correctly to determine Investment risk tolerance, and maybe even using an IPS, compliance will leave you alone at lot more.

So not only will this save you time, money, and work, you'll be on everyone's better side more too.

Also, compared to most all other types of investments and investing, mutual funds have little-to-no conflicts of interest.

This is because the shareholder, you, are usually the only shareholders.

Some mutual fund families have grown much too big, and thus have an additional layer of shareholder, like American Funds. So they have interests that are not aligned with, and are in direct conflict, with yours.

The same applies with all types of life insurance company products (whole life and annuities).

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 family (or life company), and much less about how much the mutual fund makes for the investor.

With smaller fund families, this layer of shareholder is usually not even there at all. So larger fund families are prone to all short 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. This is one of the reasons why smaller mutual funds you've never heard of before are selected, and perform better than household name brands.

About Screening Mutual Funds

The basic version of Morningstar investment database software is used in the first phase of mutual fund screening.

Screening mutual funds is similar to using a strainer to let small stuff get through, while blocking big stuff. One can tell the strainer to stop mutual funds with certain characteristics, letting only ones without them get through.

For example, if you tell it to show only large-cap growth mutual funds, it will let ~2,000 of the ~27,000 funds get through.

Then with our screens, less than ten of the ~2,000 make it through. These are the candidates for further screening. Only one of the ten will end up being the current pick.

Once the initial screening process is complete, getting information from other sources that Morningstar doesn't have, is inept at getting or is outdated, further refines it. So we may do more in-depth screening, like calling the fund to get fresh data, and reading Internet articles.

The asset class purity test is the best way to weed out undesirable characteristics in each asset class. Then performance testing over several time frames compares mutual funds against their benchmark.

Then several other tests are run to make sure there isn't a rookie manager, the market cap is right, too much is not held overseas, the 12b-1 fee isn't too high, etc.

There is no market timing involved in screening mutual funds, so where the markets are, and are expected to be, have zero influence. This is a static, mostly buy and hold, passive, pure asset allocation investment strategy.

If you've read other pages of this site, then you may be thinking we're hypocrites, because screening mutual funds is a form of "security selection" and we don't recommend that. It is, but it's within an asset allocation framework.

We don't do the hard work, which is the actual security selection (stock picking) and market timing. The fund managers do this. They're the only ones with sufficient resources to succeed at these futile tasks. We don't, you and your firm doesn't, your BD and their research department doesn't, no TV show, magazine, newspaper, or website does; so why keep doing that?

What we're doing is AKA "managing managers."

When all of the mutual funds are combined to form an investment portfolio, it's then called a Model Portfolio, which is AKA "Funds of Funds."

Our screening process is not out to find the mutual fund that will "go up" the most (so we are definitely not chasing hot funds of the current fad, like most everyone else).

They are picked to best represent each of the asset classes over the next year or two. The goal is to find the mutual fund that's purest to the asset class, appears to be behaving itself, and is free as possible of things that are known to be "bad."

This will help select the one mutual fund that behaves most like the asset class. This gives it the highest probability of going down less when the asset class goes down, and up more when it goes up.

Mutual fund analysis is like trying to herd cats because "misbehaving," by doing what they want whenever they feel like it, is just their nature. This is mostly because of pressure from their marketing people to do things that will make the fund family the most short-term money.

This is usually to the detriment of fund performance, long-term income, and shareholders' best interests. Mutual fund family managers (not the mutual fund managers) will most always choose to screw up a good mutual fund if they think they can make a little more short-term money somehow. So diligent analysis is part of a constant baby-sitting job.

As you can see on the table of historical returns here and on the asset allocation tutorial page, our screening process enables one to usually do better than ETFs or index funds. So the argument that passive investing beats active management after fees is proven false more than 90% of the time here.

See for yourself by doing the math. Use the chart and count how many times the index beat the Mutual fund in all time frames one-year or longer (ignore Monthly and YTD, as this is too short, and is just "in the noise").

Out of ~125 data points, the index beats the fund only about a dozen times on average (or ~90%). Note that the mutual fund also beats the ETF in the same asset class over 75% of the time too.

This mutual funds screening process adds value because active mutual fund picks are usually able to outperform their benchmarks for a year or two. After that, most don't and are replaced (mostly because of generic misbehaving).

A mutual fund rarely lasts more than a couple years before it gets messed up, or a better one comes along. Oppenhiemer Real Asset held the record, as being the Tangibles pick for over six years. Then it strayed from the initial objective, underperformed, changed its name, and then closed to new investors. So even the best mutual fund families misbehave given enough time.

Then CGM Realty was the no-load real estate pick most of the time from August 2002 to November 2009. It didn't stray nor misbehave, but its core strategy somehow stopped working when the financial meltdown started.

So even the best mutual funds eventually stop working, even when they have a great record of behaving themselves.

Morningstar's summary mutual fund ranking system (the number of Stars a fund has earned), is not used in our screening process. This mutual funds analysis system is too flawed, and in our opinion, has little value in the Real World.

It seems like they recommend funds and fund managers they personally like, have caught the attention of the press, are famous just for being famous (AKA the "Kardashian affect"), are the current fad, are currently "hot," and more than likely are getting kickback money from.

They say there's a formula for earning Stars, but some funds don't add up. They also keep touting the same old laggards in the press decade after decade.

So we think there's more going on than unbiased diligent analytical work when Morningstar recommends a mutual fund, and hands out its Stars.

Most of our mutual fund picks have a lot of Morningstar Stars, but very few with the full set of Stars pass our screens.

Over time we've also seen many mutual funds with the full set of Stars underperform when compared against its proper benchmark index. Free investing tip - just ignore using Morningstar Star ratings as a mutual funds guide.

Every quarter we get the Morningstar magazine, and in their mutual fund recommendations, there are always American Funds all over the place. So there's a "long-term relationship" there (probably financial, which means AFs are probably just paying Morningstar off to tout them), and that's all of the evidence needed as to why you should not take their advice on mutual fund selections.

Please note that our mutual fund screening process does not look into when capital gains distributions occur. So if you buy a mutual fund in a non-tax-qualified account today, and there's a capital gains distribution tomorrow, you'll pay tax on it and then get no benefit (other than the increase in basis).

This is because the value of the shares will fall by the same amount as the distribution.

So before buying a mutual fund in a non-tax-qualified account, you should call and ask when they expect this to happen (usually late fall), so you can wait until after distributions occur to buy it.

This gotcha is not near as big of deal nowadays, compared to the last century, when market returns were much higher.

Financial Planning Software Modules For Sale
(are listed below)

Financial Planning Software that's Fully-Integrated
(the IFP is the NaviPlan alternative for 1/6th the price)

Goals-Only "Financial Planning Software"
(the MoneyGuidePro alternative for 1% of their price)

Retirement Planning Software Menu: Something for Everyone
(the RWRs, RP, and SRP)

Comprehensive Asset Allocation Software

Model Portfolio Allocations with Historical Returns

DIY Investment Portfolio Benchmarking Program

Financial Planning Fact Finders for Financial Planners Gathering Data from Clients

Investment Policy Statement Software (IPS)

Life Insurance Calculator (AKA Capital Needs Analysis Software)

Bond Calculators for Duration, Convexity, YTM, Accretion, and Amortization

Investment Software for Comparing the 27 Most Popular Methods of Investing

Rental Real Estate Investing Software

Net Worth Calculator (Balance Sheet Maker) and 75-year Net Worth Projector

College Savings Calculator

Financial Seminar Covering Retirement Planning and Investment Management

Sales Tools for Financial Adviser Marketing

Personal Budget Software and 75-year Cash Flow Projector

TVM Financial Tools and Financial Calculators

Our Unique Financial Services
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We're Fee-only Money Managers: So you can hire us to manage your money, and/or financial advisers can hire us to manage client money, using our Model Portfolios and/or Asset Allocation Systems

Mr. Market Timer's Unique Market-neutral Stock Market Timing Services
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Consulting Services: Hire Us to Make Your Financial Plan, Retirement Plan, Benchmarking Report, Whatever

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Miscellaneous Pages of Interest
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Primer Tutorial to Learn the Basics of Financial Planning Software

About the Department of Labor's New Fiduciary Rules

Using Asset Allocation to Manage Money

Download Brokerage Data into Spreadsheets

How to Integrate Financial Planning Software Modules to Share Data

CRM and Portfolio Management Software

About Monte Carlo Simulators

About Efficient Frontier Portfolio Optimizers

Calculating Your Investment Risk Tolerance

About Discount Brokers for DIY Money Management

About 401(k) Plan Management

The Table Below Shows the Format of the Excel Spreadsheet Used

The actual spreadsheet is color-coded to match up with the Comprehensive Asset Allocation Software

Asset Class Fee-Based Mutual Fund Advice No-Load Mutual Fund Picks Front-End Load Mutual Fund Picks Index Fund Recommendations ETF Selections
Short-Term U.S. Bond
Intermediate-Term/Long-term U.S. Bond
Multisector Bond N/A
Short-Term Muni Bond N/A
Intermediate-Term/Long-term Muni Bond
High-Yield (junk) Bond
Int'l (not global) Bond
Emerging Markets Bond
Large-cap Value
Large-cap Growth
All/Mid-cap
Small-cap
Technology
Biotech/Health Care N/A
Micro-cap
Internet N/A
Int'l All-cap
Int'l Small-cap
Emerging Markets
Real Estate
Water       N/A  
Tangibles N/A

The Mutual Fund Analysis Results that Were Here Are Now Here
(Click to see the table of historical mutual fund returns)

Mutual Funds Guide and Investing Tips

About Mutual Fund Turnover and Tax-efficiency

The mutual fund turnover ratio gauges the average level of trading activity over the last one-year time horizon. It's a measure of how often holdings were sold off, and new investments purchased with the proceeds. In other words, it's the percentage of the portfolio that has been replaced in the past year.

It's a ratio, so if a mutual fund has 100% turnover, the actual percentage of the portfolio traded was much less than 100%.

For example: A mutual fund that sold the equivalent of all of its assets, would have a turnover ratio of about 500%. If it sold a quarter of its assets four times, then it would have a ratio of 100%; even though 75% of the holdings may never have been traded. A fund would have a ratio of 0% if it sold 10% of its holdings, then 10% of the fund's worth of new money came in and was invested.

The mutual fund turnover formula is:

(Whichever is less: Assets Sold Off - or - New Investment Purchases) / (Net Assets - 12 quarter average) = Mutual Fund Turnover Ratio

About the only things one can generalize are: The higher the trading activity, the higher the trading expense, which you pay in management fees. This also means higher capital gains taxes, and probably higher dividend distributions. This matters much more in personal / non-tax-qualified accounts than in tax-qualified accounts.

The higher the turnover ratio, the less time they're holding securities before they sell them. A lower ratio would indicate a longer-term "buy and hold" investment strategy.

The higher the ratio, the more the managers are making short-term trades, which could mean an over-emphasis on market timing techniques (which is usually bad).

Also, these ratios change frequently and are not stable (therefore offer no predictive ability either way). If a fund was holding Microsoft since the 80's until it got to certain level, then the plan was to sell it all, then a fund with a low turnover ratio for a long time would suddenly have a very high ratio.

A sudden change in turnover ratio may indicate the fund had a big change of some kind - in managers, style, or emphasis on asset allocation / market timing / stock picking / security selection / use of derivatives / etc.

Bond funds will have low ratios and small-cap equity funds will have high ratios.

The desired ratio depends on what type it is, why you'd want to own it, and other factors, like Investment risk tolerance.

One would need to compare a fund's turnover ratio to a basket comprised of similar mutual funds to see if it's out of line compared to the average. If so, it could potentially signal danger ahead both in losing money and/or getting sub-par returns.

Some investors put this ratio into their screens to see if the fund changed its strategy. We don't because we feel the numbers are too volatile to mean anything. If a ratio that was too high or low was hurting return performance, then it wouldn't pass the screens in the first place. All we care about is bottom-line asset class performance, and since we found turnover ratio to have zero predictive ability, we do not screen for this at all.

About the only disadvantage of a high ratio, in our opinion, are the potentially higher capital gains taxes (which don't matter at all in tax-qualified accounts like IRAs). Which segues into the next topic....

Mutual Fund Tax-Efficiency

This measures the amount of profit compared to the amount of capital gains taxes generated. If a mutual fund generates a lot of taxes, but has little profits, it would have low tax-efficiency; and vice versa.

If a fund is in a tax-deferred account (IRA or 401k), then you don't care about tax-efficiency (or the turnover ratio). But if it's not, then you may.

Mutual fund tax screening bottom lines:

• You can't make money without ending up paying taxes. The amount of money you make in profits is around three times the amount of taxes paid, so it makes no sense to not profit because you hate taxes. Trying to minimize taxes will only result in not making profitable investments, so you'll end up with sub-par returns. Over time this could result in half of the retirement income you could have had.

• If mutual fund tax-efficiency was important, then investment database firms would track it. Most investors find it unimportant (these days), so it's hard to find investment software that has this capability in its screening function (Morningstar does not have this in their filter. We wouldn't use it even if it did, as it would have zero predictive ability when it comes to asset class performance).

• Rarely have any tax-efficient / socially responsible / extremely low management fees / or low turnover ratio funds passed our screens. Things like this are in the press only because there's little else to write about these days. It's all just "financial pornography," so just ignore it.

If you care about these things, then you'd buy tax-efficient mutual funds (or ETFs) only if you really really hated paying taxes, really really cared about saving humanity, you just have to have a mutual fund with extremely low management fees, or you don't think fund managers should be trading with your money so much.

You can have pride that you've accomplished these goals, but you'll most always be making much less in profits and income compared to not having these constraints.

• All investments with capital gains will have to be sold eventually, as no company can dominate their market and create above-industry returns forever. So if a mutual fund has high tax-efficiency / low turnover for a long time, it's only a matter of time before things change, and this bulk of profits has to be taken.

Then you're going to get a huge tax bill when you least expected it. In other words, a very tax-efficient fund today could be a very tax-inefficient fund tomorrow, and vice versa.

Then the fund may close because it failed to meet its objective. There are no warning signs that will tell you in advance when any of these will happen.

The only way around this problem is for the fund to hold securities that are going to get sub-par returns in the future (stocks that don't go up a lot, or managers that fail in their duty to buy low and sell high).

This is what tax-efficient funds do, which is why their returns are mostly always sub-par.

It would be very interesting to see long-term performance differences between mutual funds with constant low efficiency, constant medium efficiency, constant high efficiency, then extremely volatile and random efficiency; but there's no way to do this (yet).

More than likely, the differences would be insignificant and would have no predictive value anyway.

What Mutual Fund Share Class Letters Mean

The actual fund managers, fund family management, underlying investments held, management fee, and performance are usually the same regardless of the share class.

Share classes are only for distinguishing differences between the ways fees and commissions are paid to the system and to advisors for selling the same underlying mutual fund in different ways.

Some share classes are only for variable annuity subaccounts, variable universal life insurance subaccounts, and institutional accounts. Individual investors won't be able to buy these through a discount broker.

Morningstar has about 26,500 mutual funds in their database. If you eliminate all of the share class duplicates, then there are only about 7,000 actual mutual funds.

The A-Share Class of Mutual Funds

This is the type of mutual fund where you'd pay a front-end load / sales charge / commission every time you contribute money to the fund.

It's common for a mutual fund to not allow any way of getting around paying the front-end load, other than going through a Fee-Based investment advisor.

Compared to B- and C-shares, A-shares have a bad rap because the initial commission is the most obvious and painful. It also stands out like a target to give the press something to whine about.

But as you can see when you crunch the numbers with this investment software, they have much better long-term results than B- or C-shares.

That's because you're paying commissions on the smallest amounts of money possible - the initial contributions. The big money disappears from your Mutual fund in future years when the account grows, and the higher annual B- or C-share 12b-1 fees are applied as a percentage of the total account balance. This eats away at your money more and more every year.

So paying an initial A-share sales charge is going to make more money for you than getting more and more sucked away every year in the higher 12b-1 fees of the B- or C-share classes.

The bottom-line for a mutual fund investor is if you're going to compensate a commission-based advisor, you want to do it with the smallest amount and get it over with ASAP.

So when a mutual fund advisor asks you which method of buying mutual funds you want to use, choose A-shares over B- or C-shares. They'll never object to that.

Now that you know the difference, just tell them you'd rather buy the kind of mutual funds that have an initial commission if they start talking about redemption fees.

Compare the long-term results of different share classes in minutes by looking at the investment comparator demo.

The B-share Class of Mutual Funds

This is where there are no up-front sales commissions (loads) on contributions to the mutual fund, but the fund family will deduct this percentage from "early" withdrawals.

They usually decline annually, and eventually go away altogether.

These are also called redemption fees, back end loads, or deferred sales charges (DSC or DFSC or CDSC - the F stands for Fund and the first C stands for Contingent).

Investors easily fall for B-shares in sales situations because they don't understand the short-term vs. long-term differences. They think they're beating the system by avoiding the initial pain of paying the A-share front-end load, because they won't be selling while the redemption fees are in force.

The system can't be beat like this. Advisors make the same amount of up-front commission with B-shares as they do with A-shares, which explains why they're so motivated to sell them.

B-shares usually charge higher annual 12b-1 fees than A-shares to generate the up-front commission over time. This money has to come from somewhere, so if you don't sell shares while redemption fees are in place, then there is nowhere to get the money to pay the adviser upfront commissions.

So they'll get it along the way by charging you much higher 12b-1 fees.

They're going to get you if you stay and/or if you leave early. They're either getting the money to pay the advisor's commission through the higher 12b-1 and the redemption fee if you do redeem, or through the higher 12b-1 fee if you don't.

So you can't win either way with B-shares. This is why there's stricter regulations and more scrutiny on advisors that sell them.

Then after the redemption fees go away, advisors will want you to sell that fund and buy another, or buy different classes of shares, or totally different types of products (annuities) so they can get paid again. They're supposed to have you sign a form acknowledging that you're paying again, but slick advisers can usually gloss this over and get you to sign off fairly easily. The form is to alert compliance people, but rarely does anything happen other than a phone call (maybe saying not to do it again to repeat offenders), especially if the advisor is a big producer.

Doing this without a good reason stated on the form is a violation of Finra rules. Note that, "so the adviser can get paid again at the investor's expense ASAP," is not a good reason.

But since compliance people rarely tell Finra about their rouge advisers, they rarely find out, and nothing happens (other than you paid again and the system made more money). So just don't fall for that.

Read your prospecti and figure out when the redemption fees expire. Then you'll know the real reasons why your advisor is calling around that time (usually saying those mutual funds went bad and now you need to buy new ones).

Here are three examples of why it's best to pay a load when you buy compared to when you sell:

Say you invest $10,000 into an A-share fund at 5% load. You pay $500 up-front in commission. It goes up at a 10% gross total rate of return. Then an emergency happens one-year later and you need to sell it all. You'd get around $10,331 assuming a 1% management fee and a 0.25% 12b-1 fee.

If you bought the B-share version, then you would avoid paying the initial $500. But when you sold, you'd only get $10,260 back, assuming a 1% management fee, 1% 12b-1 fee, and a 5% back-end load. This $71 is only a 0.7% difference in the first year, but it grows over time.

The calculations using the same assumptions over a five-year period, assuming the back-end load reduced to 3%; would net $14,450 for the A-share fund, and $14,252 for the B-share fund. This is a difference of $198, or 1.4%.

The calculations using the same assumptions over a ten-year period would net $21,979 for the A-share fund, and $21,589 for the B-share fund. This is after the redemption fees totally went away. This difference of $590, or 1.8%, was only due to the 0.75% difference in annual 12b-1 fees.

So as you can see, the difference grows annually (0.7% in one-year, 1.4% in five years, and 1.8% in ten years). Plus the higher the growth rate, the higher the 12b-1 fees, and the more the difference grows too.

Then not being able to sell a fund that went bad, and replace it with a better one, because you don't want the pain of the commission deduction, May lead you to holding a bad fund for many years, which could eventually cut your retirement income by as much as half.

So no matter how you look at it, you'll almost never do better in B-shares compared to A-shares. So just don't buy B-shares.

The C-share Class of Mutual Funds

This is where the mutual fund does not charge a front- nor back-end load, but charges up to several times more in annual 12b-1 fees than on A-shares (and sometimes even more than B-shares).

This money goes to the investment advisor as an "annual investment management fee." This allows commission-based advisors to charge clients an annual fee, and have it treated as commissions, so they won't have to spend the resources to be able to charge actual investment advisor fees, like an RIA.

Working on a fee basis is generally fairer for both the client and advisor than getting paid via commissions. As long as everyone is okay with the advisor making money like this, there really isn't anything wrong with it.

But it's a common abuse when it's not disclosed, advisers charge additional investment advisory fees on top of C-share fees, and they steer clients only toward C-shares instead of using More suitable mutual funds.

When this abuse occurs, it's usually found that the advisor perpetrated all three abuses at the same time. When we've seen advisors doing this, the clients had no idea and were shocked when they realized the total amount of annual fees were over 3% (1%+ 12b-1, 1.5% advisor management fee, and over 0.5% in "other fees").

Advisors do this because these different types of fees are all shown on different statements, if at all, so clients' are usually too busy or ignorant to catch on. So it's an easy way to both maximize income, and minimize the risk of getting caught (and into trouble).

Any investor experiencing this (total fees over 3%) should immediately fire their advisor by writing a hard copy letter requesting their account be closed to the advisor's branch manager. Then demand 1% of your money back for every year it happened from your mutual fund advisor.

Anything over 2% is considered to be abusive, especially if there is no hard copy disclosure letter with the client's signature saying they understood and approved. If the total is between 2% and 3%, then just call the branch manager and complain.

So it's important to add up all fees that the fund, mutual fund advisor, Broker Dealer, custodian, and everyone else charges, and then decide if you think you're getting your money's worth.

Like you've heard before, obtain and read the Fees and Expenses section of the prospectus on every mutual fund, and all of the other paperwork your advisor gave you, before and after you invest.

If all fees on everything related to your advisor adds up to over 1.5%, then you're probably just being overcharged a little bit. If you're being charged a lot, and not consistently and substantially beating the markets, then you'd probably be better off finding a true fee-only advisor or managing your own money.

The LW-share Class of Mutual Funds

"LW" stands for Load Waived, which means the investor buys the A-share class without paying the initial sales charge. So it's similar to buying A-shares in a Fee-Based account at NAV.

The advent of LW funds is one of the best things to happen for investors in a long time. But in most cases, these are not available to individual investors. Most small-time advisors can't even get LW shares at NAV. They're mostly for institutional investors.

This is relatively new, so it will take time for things to be worked out. As more deals are negotiated with more custodians, more Fee-Based and fee-only advisors will be able to buy them for their clients.

So buy LW funds if you can, but more than likely this "innovation" will continue to peter out just because of redundancy.

Miscellaneous Info

Some mutual fund families change these share class letters around to try to trick you into thinking they're not dinging you fees and commissions. The vast majority of mutual funds are one of these four types, even though they may be called their "Y" share class.

All you'll need to do is evaluate the front-end load, back-end load, and the size of the 12b-1 fee to see share class it really is. There's only "three knobs to turn" on the mutual fund money-making machine, so where these knobs are set to determine which share class it really is.

If an investor hires a mutual fund advisor for investment advice, then they deserve to be paid somehow. So you'll end up paying in one way or another. This is all fine, as long as the investor understands how their money gets shaved off of their investments, and where it's going.

The only way to not pay anyone anything, other than the mutual fund management fee (which can't be avoided and goes to pay the mutual fund and its investment managers), is to learn how to manage your own money and/or do your own mutual fund analysis (then only buy true no-load mutual funds).

If a mutual fund has a 12b-1 fee, which most do, then there's no way around that either. But you should pay attention to who gets claim to it, as it could be the source of a conflict of interest.

The average is 0.25%, so if it's much more than that, then think about shying away. But also keep in mind that posted returns are after 12b-1 fees, so if a fund is producing superior results, then you shouldn't care if you're paying 0.35%.

12b-1 fees were originally designed to pay for the fund's advertising and marketing expenses, but they quickly morphed into extra compensation for the adviser and/or Broker Dealers (and then later custodians, like Schwab).

Only U.S. citizens, currently living in the U.S., can buy and own most mutual funds. Most mutual fund families (e.g., Fidelity) have stopped letting U.S. citizens living abroad buy and trade shares in their brokerage accounts. This is because of the U.S. Foreign Account Tax Compliance Act.

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The table comparing our Fee-Based Moderate Portfolio Model to its proper benchmark index, the markets, an American Funds Model, is here on the main asset allocation tutorial page.

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