Stocks or Funds?

Is it better to buy individual stocks or mutual funds? It depends, of course, on several factors like how much to invest or how much risk you’re willing to take. If you have a high tolerance for risk and millions of dollars to invest, you may be a good candidate to own individual stocks. If you only have $1,000 to invest, a mutual fund is a better option.

When building a portfolio for your future focusing on your goals will help you determine the best strategy. How much to invest? What is your tolerance for risk? How involved will you be in managing your assets? How much time will you commit to researching new investment ideas?

A portfolio of 30 individual stocks or more is recommended for a diversified portfolio.[1] A report on Morningstar’s website suggests 18 to 20 names.[2] When individuals pick their own stocks, they focus primarily on large companies with brand name recognition like Apple, McDonald’s, or Pfizer. Few investors add small or international stocks to their portfolio.

RiskAlyze® helps investors and advisors quantify risk. The risk score for the S&P 500 is 74 on a scale of 1 to 99. A T-Bill, by comparison, has a risk score of 1. I sent a list of 20 large-cap companies to a client for review. The risk profile for the portfolio was 73, or 1 point lower than the S&P 500 Index. If the risk levels are similar, why not buy the index? The Vanguard S&P 500 fund owns 500 companies with exposure to every sector; it’s also cheaper than buying 20 individual stocks.

What about the FAANGs – Facebook, Amazon, Apple, Netflix and Google? Yes, if you owned these 5 stocks you destroyed the S&P 500 over the past 5 years. The FAANG portfolio soared 272%, bettering the S&P 500 by 205%!  How do you identify these companies in advance? The best performing stock in the S&P 500 index this year is Xerox, a stock that has underperformed the market by more than 100% for the past 10 years. Last year it dropped 30%. Xerox was probably not on your radar screen. The other stocks rounding out the top ten are Cadence Design, Advanced Micro Devices, Chipotle, MSCI, Anadarko Petroleum, Total System Services, Synopsys, Global Payments, and DISH Network. These 10 stocks have outperformed the FAANGs by 33% this year! Finding consistent winners to beat the market each year is tough – if not impossible.

Investing in large companies with brand name recognition makes sense on the surface, but it ignores a fair chunk of the global market. Vanguard’s Total World Stock fund invests 73% of its assets in large-cap stocks with 57% allocated to the United States. An all large-cap U.S. portfolio ignores bonds, small companies, real estate, gold, and international investments.

Picking individual stocks also takes time. An hour per stock, per week has been suggested. If you own 20 stocks, you’ll need to set aside 20 hours per week for research. Can you commit 20 hours per week to review your portfolio?

For most investors a globally diversified portfolio of low-cost mutual funds based on your financial goals is the best path to take.

Diversification is your buddy. ~ Merton Miller

July 5, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.

 

 

 

[1] https://www.investopedia.com/articles/stocks/11/illusion-of-diversification.asp, Jason Whitby, June 25, 2019.

[2] https://news.morningstar.com/classroom2/course.asp?docId=145385&page=4

What Is Your Fee Schedule?

Good morning and welcome to the first annual financial planning and investment management fee summit. My name is Nate Narrator and today we’ll talk to a panel of financial advisors, planners and brokers to discuss their fee schedules and how they charge clients.

Our distinguished panel includes the following individuals: Andy AUM, Rebecca Retainer, Hank Hourly, Cindy Commission, Frank Flat Fee, and Patty Planner.

Let’s meet the panel.

Andy AUM. Andy charges an asset under management fee of 1%.

Rebecca Retainer. Rebecca charges a monthly retainer fee that ranges from $125 to $500 depending on your annual income.

Hank Hourly. Hank charges an hourly consulting fee between $250 and $500 per hour depending on your annual income, assets, and complexity.

Cindy Commission. Cindy charges a commission on everything you buy and sell, regardless if it’s a stock, bond, mutual fund, or insurance product.

Frank Flat Fee. Frank charges a flat fee of $5,000 regardless of your annual income, assets, or complexity.

Patty Planner. Patty is a financial planner. Her fee ranges from $2,500 to $25,000 for a comprehensive financial plan. She also has a fee schedule for one-time modular plans like education, retirement, asset allocation, or cash flow planning. The modules cost $1,500 each.

Nate:

Andy tell me about your assets under management model.

Andy:

Thanks Nate! My model is based on your level of assets. The fee, as a percentage, will drop as your assets grow. The fee includes financial planning and investment management. It’s all rolled into one fee.

Nate:

Thank you. As the accounts grow in value, you’ll also make more money – correct?

Andy:

Yes, but so will my clients.

Nate:

What if the accounts drop in value like they did in 2018?

Andy:

The fee will go down if the accounts drop in value. My income will be lower as well.

Nate:

Hank, please tell me about your hourly model.

Hank:

Will do. I charge an hourly fee for my services. The initial client meeting will last an hour. The financial plan, preparation and presentation typically takes 8 to 10 hours. I should add, the initial consultation is free.

Nate:

So, about 8 to 10 hours to get a client up and running with their plan and your recommendations?

Hank:

Yes, that’s correct.

Nate:

At $500 an hour, your fee will run $4,000 to $5,000?

Hank:

Yes, that’s correct. It could also be more or less depending on the project. Some clients come to me for an investment review, others for a full-blown plan. It also includes driving time, research, etc.

Nate:

Thanks Hank. Rebecca, please tell me about your retainer model.

Rebecca:

Thanks Nate. I’m excited to be here today. My retainer model is a monthly subscription fee based on a client’s annual income. The fee works just like a car or mortgage payment. The client can add my fee to their monthly budget like they would for their other expenses.

Nate:

A car payment?

Rebecca:

Yes, our retainer fee ranges from $125 to $500 per month, with a one year minimum, depending on income.

Nate:

Interesting. So, if someone had income of $50,000, their retainer fee will be less than someone with $500,000 income, correct?

Rebecca:

That’s correct. It’s based on income.

Nate:

How long do your client’s pay a retainer fee? How long do they stay in this arrangement?

Rebecca:

Our clients stay with us for about three to five years before they move on.

Nate:

What if a client wants to invest based on your recommendations?

Rebecca:

We don’t manage money. We refer them to another fee-only advisor or recommend a robo-advisor platform.

Nate:

Cindy, your fee schedule is probably the oldest and most known to those in the audience. Tell us about your fee model.

Cindy:

Thank you, Nate. Commissions have been around forever and it’s a straight forward fee model. If a client places a trade, a commission is charged.

Nate:

So, the more you trade, the more you make?

Cindy:

Yes, that is true. However, our investment recommendations are made with the client’s best interest in mind.

Nate:

Of course. What’s the commission on a mutual fund trade?

Cindy:

The front-end commission on a mutual fund will cost the client 4% to 5% of the purchase price.

Nate:

If a client gives you an order to buy $100,000 of XYZ mutual fund, they’ll pay $4,000 to $5,000?

Cindy:

Yes, it’s a one-time charge.

Nate:

What about an annuity purchase?

Cindy:

The client won’t pay a front-end sales charge, but they’ll incur a fee if they liquidate during the deferred sales charge period.

Nate:

Give us an example please.

Cindy:

Sure, if a client purchases ABC annuity with $100,000, then 100% of their money goes to work from day one. If they sell their annuity during the first 10 years, they will incur a fee of 10% to 1%.

Nate:

10%? That seems outrageously high. Am I wrong?

Cindy:

It’s a high fee, but we encourage our clients to be long-term investors.

Nate:

What would your fee be if they purchased the ABC annuity?

Cindy:

It is 5%, or $5,000.

Nate:

Will the client incur any other fees?

Cindy:

Mutual fund expenses run about 1% per year; annuities will cost about 3% to 4% per year. The individual stocks and bonds don’t carry a monthly fee after their purchase.

Nate:

Thanks Cindy. Frank, tell us about your flat-fee model.

Frank:

Yes sir. Just as it sounds, it’s a flat fee regardless of income or asset level.

Nate:

A client with $50,000 in assets will pay just as much as someone with $5 million in assets?

Frank:

That is true. However, we have an account minimum of $500,000.

Nate:

If a client pays you a flat fee, what’s your incentive to manage their account? You get a flat, consistent fee regardless if their account goes up, down or sideways.

Frank:

Well, the fee is more than asset management fee. I also get paid for advice and financial planning.

Nate:

How do you manage the assets for your clients?

Frank:

We use mutual funds.

Nate:

Do the clients pay a fee to purchase the funds?

Frank:

They do. The fee is $25 per trade which goes to the custodian. I don’t receive the fee.

Nate:

Thanks Frank.

Nate:

Let’s her from Patty. Patty tell us about your fee structure.

Patty:

Thank you, Nate. I only charge client for advice and financial planning.

Nate:

Interesting. What about managing assets?

Patty:

I don’t manage any assets. I refer clients to another fee-only advisor or send them to a robo-advisor, like Rebecca does.

Nate:

Okay. If a client comes to you for financial planning and advice, what does it look like?

Patty:

The financial planning fee ranges from $2,500 to $25,000 depending on a client’s complexity.  Once the plan is done, the client is free to choose any investment platform they desire. I’ll give them suggestions, but it’s their choice. I don’t get paid for investment advice, nor do I receive a referral fee from any advisor.

Nate:

Okay, thank you all for your input. Let’s look at a client with $500,000 in assets with an annual income of $250,000 so we can compare the different models. Who wants to go first?

Andy:

I will. My fee would be $5,000 per year, or 1% of $500,000.

Rebecca:

My fee would be $6,000 per year, or $500 per month.

Hank:

For a client with this profile I’d charge $500 per hour. We’d meet for about 10 to 12 hours during the year, so the fee would range from $5,000 to $6,000.

Cindy:

Her assets would qualify her for a breakpoint for the mutual fund company I use, so the commission would be $20,000 – one time.

Frank:

My flat fee remains the same regardless of a client’s assets or income, so it would be $5,000.

Patty:

This planning fee for this client, based on her assets, would be $5,000.

Nate:

Hmmm… It looks like all your fees are similar, except for Cindy’s, but over a 3 to 4-year period all your fees will be about the same, correct?

Panel:

Yes.

Nate:

Also, regardless of the stock market’s performance, you’re all getting paid?

Panel:

Yes.

Nate:

Last question: Who’s model is best?

Panel:

(In unison): Mine.

Nate:

(laughing), Okay! Thank you all for your time today.

“A rose by any other name would smell as sweet.” ~ Romeo and Juliet

April 3, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

At PWM we charge .5% on the first $10,000,000 and then .35% above this amount. Our financial planning fee is $800.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

Beware Ten Year Track Records

Mutual fund companies and asset managers will start touting their 10-year performance record with dazzling numbers. The marketers will try to lure you in based on their outsized performance. But, before you invest, dig deeper. Ask to see their 15-year track record. If they don’t have one, review their performance from 2008. How did the fund perform during the Great Recession?

These companies are rejoicing, as they should, because it’s March 2019 and they’re now able to report their 10-year track record without including the disastrous year of 2008. The bear market is finally in the rearview mirror for reporting purposes.

How significant is this change? Well, the 10-year average annual total return for the S&P 500 from March 2009 to 2019 has been 16.5%. By comparison, the 10-year return ending 2018 was 7.13% – a difference of 9.37%! Since 1926 the S&P 500 Index has averaged 10%, so the recent returns are well above the historical average.

Of course, the returns are what they are, but they’re exaggerated due to the sharp sell-off during the Great Recession when the S&P 500 Index fell 53%. The index bottomed on March 9, 2009 and then it went on an extraordinary run for the next 10 years, rising 317%! If, and it’s a big if, you invested $10,000 at this juncture it would be worth $41,750 today.[1]

Despite these outsized gains a majority of U.S. Large Cap Funds still underperformed their index. In fact, only 10.9% of actively managed mutual funds beat their index over the past 10 years. The funds with the lowest cost did slightly better as 17.3% of this group beat the index. However, funds with high fees were destroyed as only 2.1% managed to do better than the market.[2]

Here are a few suggestions to help you build a mutual fund portfolio.

  • Invest in low-cost mutual funds managed by Dimensional Fund Advisors or Vanguard. Adding Exchange Traded Funds (ETFs) from Blackrock or Vanguard will help keep your costs low.
  • Diversify your assets across large, small and international funds. Adding bonds and real estate holdings will further diversify your portfolio.
  • Build your portfolio around your financial goals and risk tolerance. These two ingredients will help determine your asset allocation.
  • Time is your friend when investing in the stock market. A time horizon longer than five years should include a heavy dose of equity funds.
  • Rebalance your investments once or twice per year. This will keep your asset allocation and risk tolerance in check.
  • Review past returns for as long as the data is available on your fund. You can research this data on several sites including Yahoo! Finance, Morningstar, YCharts, or the Wall Street Journal.
  • Analyze the fee structure. Avoid funds with a front-end sales charge, a deferred sales charge, or a 12b-1 fee.
  • Incorporate a buy and hold philosophy. Don’t fret the daily fluctuations in the market or listen to the “experts” about the pending correction.

This past decade has treated investors well. What will the next decade bring? Who knows, but if history is a guide, it will be a good one.  Stay invested my friends.

I can only control my own performance. If I do my best, then I can feel good at the end of the day. ~ Michael Phelps

March 20, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. Past performance does not guarantee future results.

 

 

 

 

 

 

 

[1] YCharts – March 9, 2000 – March 20, 2019

[2] https://office.morningstar.com/research/doc/Feb%2007%202019_US_ActivePassive_Barometer_-_7_Takeaways_from_the_2018_911724, Ben Johnson, 2/7/2019

What Is A Mutual Fund?

Several years ago, I met with a client who was retiring from his long-time employer. He wanted to purchase a basket of stocks for growth and income. We discussed mutual funds as an alternative to owning numerous stock positions. He wasn’t aware that mutual funds could own stocks. I informed him that a mutual fund is a portal for owning stocks, bonds, or other investments. He thought he had to choose between stocks or funds. After our meeting he felt more confident owning 10 to 12 mutual funds rather than 100 to 200 individual stocks.

What is a mutual fund? It’s a professionally managed portfolio of stocks, bonds, or alternative investments. A fund may have a specific purpose or a broad mandate. A globally diversified portfolio of mutual funds will give you access to tens of thousands of investments held across several sectors. Morningstar currently tracks over 27,000 funds, so you’ll have plenty of choices for your portfolio!

Mutual funds do not trade during market hours, but the investments they own do. At the end of the trading day, a fund company will add up all the gains and losses, net out the expenses, and divide by the number of shares to arrive at the net asset value (NAV). The NAV will determine the gain or loss from the previous day. If you were to look at your account during the trading day, you’ll probably see a bunch of zeros under the daily change. After the market has been closed for a couple of hours you’ll be able to see how well your funds performed during the day.

Mutual funds distribute dividends and capital gains throughout the year. Dividends are usually paid quarterly and capital gains annually. Dividends and capital gains add to your cost basis. For example, if you invest $100,000 into a fund and it pays a $10,000 capital gain and a $2,000 dividend, then your adjusted cost basis is now $112,000. Let’s say you sell your fund for $109,000. Your realized loss would be $3,000 but your overall gain is $9,000. Make sense? You invested $100,000 and sold it for $109,000. The $12,000 in dividends and capital gains were added to your basis allowing you to take the loss.

Most people like to buy stocks they know, names that are familiar. If it’s mentioned on CNBC, it must be a stock to own – right? Regional bias may play a part in your investment decision. If you live in Houston, you may own Exxon. A mutual fund will give you exposure to companies you’ve probably never heard of or considered buying. For example, The Dimensional U.S. Small Cap portfolio own shares of Medifast. Medifast has a year-to-date gain of 213%.

Is there a downside to owning mutual funds? In a globally diversified portfolio, you’ll own a few funds underperforming the broader market. Last year the emerging market sector rose 31%, this year it’s down 9%. Mutual funds are pass-through investments, meaning they pass on the dividends and capital gains to their shareholders and this will trigger a tax bill for investments held in taxable accounts.

Mutual funds also have internal fees called operating expenses. Some funds may also charge a front-end commission of 5% or more, so if you invest $10,000, they’ll deduct $500 from your investment. Other funds have back-end sales charges if you sell your fund. If you sold your fund for $10,000, they’ll send you a check for $9,500. Other funds have 12b-1 fees of .25% which are used for marketing purposes. If you invest in mutual funds, pay attention to fees. You can control the fees you pay, so pay attention to the bottom line. For the record, I only recommend funds with low fees and no sales charges or 12b-1 expenses.

Over time, it’s hard to beat the performance of a globally diversified portfolio of mutual funds with low fees. If you have a long-term time horizon and a tranquil temperament, the long-term trend of the markets will treat you well.

and knowledge with self-control, and self-control with steadfastness, and steadfastness with godliness… ~ 2 Peter 1:6

10/19/2018

Bill Parrott is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

 

 

 

Think Different™.

Think Different was a successful advertising campaign launched by Apple in 1997, the same year they introduced us to the iPhone, a revolutionary product. The iPhone allowed us to think and act different by changing the way we communicate and access data. Companies like Uber have prospered because of it.

The iPhone is simple to use and has clean lines with nominal clutter. A touch of an app can connect me to almost anything. I don’t have to program it or learn a complicated algorithm to operate my phone. If I want to check my flight, buy a book, take a picture, listen to music, or find a restaurant I touch the appropriate app and voila.

The iPhone, however, is anything but simple. It’s loaded with powerful, complex components under the touch screen glass; components like a lithium ion battery, bionic application processer, wi-fi chips, XMM 7480 modem, wireless charging chip, super retina HD display, loudspeaker, charging coil and Taptic engine.[1] I don’t understand how these sophisticated apparatuses work, but they’ve simplified my life.

Cell phones operate from wireless networks using radio frequency connected to telecommunication networks around the world and satellites in space. These systems are difficult to create and far from simple. And, the only way for a satellite to get to space is to be shuttled by a rocket. Rocket scientists, engineers, and PhDs use mathematical formulas few people can comprehend to design and build these systems.

Mutual funds, especially index funds, appear simple but under the wrapper there are high levels of sophistication. For example, the Dimensional Fund Advisors (DFA) model was built with financial science. DFA is armed with PhDs, engineers, and other smart people working to remove complexity from the investment process.

Dimensional Funds was founded by David Booth and Rex Sinquefield in 1981 and utilized the work of Dr. Eugene Fama. Dr. Fama was awarded the Nobel Prize in Economic Science in 2003 for his work on the efficient market hypothesis. He, along with Professor Kenneth French of Dartmouth, developed the three-factor model for stock investing, known as the Fama-French three-factor model. The three factors are: stocks outperform bonds, small companies outperform large companies, and value outperforms growth.  These three themes appear simple but the research to arrive at these conclusions is anything but.

In addition, Dimensional worked with several Nobel Laureates, before they were awarded their prizes including Merton Miller, Myron Scholes and Robert C. Merton. Merton Miller said, “I like that Dimensional invited all these Nobel laureates on their board before they got their Nobel Prizes. It’s easy to invite them afterward.”

One of the arguments against mutual funds is that they’re too simple for sophisticated investors, a major misconception. Investors are also concerned about missing out on high flying stocks like Amazon, Apple or Nvidia. Well, these three companies, and many more, are currently held inside a few of the funds managed by Dimensional. In addition to those popular companies, they also own Ablynx NV, ASE Industrial Holdings, Axon Enterprises, Enova International, PT Indah Kiat Pulp & Paper, Seacor Holdings, Suzano Papel E Cellulose SA, Tenent Healthcare, and Yageo Corporation – all up more than 100% so far in 2018. Furthermore, a diversified portfolio of mutual funds will give you global exposure across multiple sectors.

As you construct your portfolio think differently. Don’t worry about picking a few hot stocks, rather focus on your financial goals and dreams. A financial plan will help quantify your goals and establish the proper asset allocation. Once your plan is complete, invest in a portfolio of mutual funds diversified around the globe – simple!

Simplicity is the ultimate sophistication. ~ Leonardo da Vinci

May 10, 2018

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  Our mission is to remove confusion, complexity, and worry from the financial planning and investment management process. For more information please visit www.parrottwealth.com.

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.

 

 

 

 

 

[1] https://www.bloomberg.com/features/apple-iphone-guts/, published 10/12/17, updated 12/6/2017.

Why Don’t We Own Amazon?

The performance of Amazon’s stock has been remarkable. This year alone its stock price is already up 24% and it has generated an average annual return of more than 37.5% since it went public 21 years ago.  A $10,000 investment in 1997 is now worth $7.4 million![1]

Jeff Bezos, the CEO of Amazon, once said, “Your margin is my opportunity.”  From its humble beginnings as a book seller it has grown to dominate more than a few categories.  It has decimated the retail sector and it’s looking to conquer the healthcare and freight delivery industries.  When these initiatives were announced it sent several stocks tumbling, stocks such as Walgreens, United Healthcare, and FedEx.

It’s hard to beat Amazon as a stock and a company.  Amazon Prime is a phenomenal service.  I recently went to my local Home Depot to buy a cabinet hinge but couldn’t find what I was looking for, so I logged into my Amazon account, ordered the hinge, and had it delivered to my home the following day.

At a recent account review meeting I was asked by a client why he didn’t own any shares of Amazon.  I told him he owned it indirectly through his mutual funds.  I showed him where four of his funds owned a sizable position in Amazon and this meant his allocation amounted to about 1% of his stock holdings.

Furthermore, I pointed out to him how he also owned Alphabet, Apple, Facebook, Netflix and the other highfliers he repeatedly hears about on CNBC.

We continued our meeting and I asked him if he had ever heard of Douzone Bizon.  He had not.  I said it’s a South Korean company and this year the stock is up 64%.  I told him he owns it through his emerging markets fund.   I then asked him if he knew anything about Ablynx.  He hadn’t heard of this company either.  I mentioned to him that it’s a Belgium company he owned in his international small-cap fund and the stock is up 112% year-to-date.   I mentioned one last company he hadn’t heard of, KapStone Paper and Packaging.  This is a company he owns in his US small cap fund and it’s up 52% so far.

As the meeting progressed, we discussed how he owns several thousand companies from around the world giving him exposure to companies he might not buy on his own.  Individual investors who trade stocks tend to focus on buying shares of companies they know and trust. This isn’t a bad strategy, but it often ignores companies from around the world.  The United States stock market accounts for about 52% of the global stock market capitalization meaning the remaining 48% is outside of our borders.  If an investor only focuses on our market, he may miss out on opportunities found in other countries.

After our meeting my client felt better because he owned shares in Amazon through his funds.  He no longer felt as if he was missing out on one of the great stock market success stories of our time.

If you decide that you’re going to do only the things you know are going to work, you’re going to leave a lot of opportunity on the table.” ~ Jeff Bezos.

 

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

2/24/2018

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog and investments aren’t guaranteed.  Photo Credit: Tom Cross.

 

 

 

 

 

 

[1] Morningstar Office Hypothetical Tool.  AMZN stock price from 5/15/1997 to 1/31/2018.

Do You Fly First Class?

Flying first class is an incredible experience and enhances the pleasure of travelling.  I’ve relished the warm towels, fine dining and exceptional service of first class travel.  Unfortunately, I’ve also sat in the last row sipping diet coke from a plastic cup while rationing pretzels.

Does it pay to fly first class?  Regardless of where people sit all passengers will take off and land at the same time.  A Delta One round-trip ticket from Los Angeles to New York costs $4,258 and the economy seat costs $552.  Is the experience of flying first class 7 ½ times better than economy?  It might, especially if you’re receiving value for the price you paid, and your expectations are being met.  When I fly first class my expectations are high; when I sit in economy they’re low.

Like the airline industry, mutual funds have a wide divergence in fees.  Unlike the airline industry, shareholders don’t benefit from higher fees.  Quite the opposite as high fees will lower your investment returns.  Higher fees won’t deliver a better investment experience.

Below are three funds with different fee structures listed from the highest fees to lowest.[1] The Dimensional Fund has the lowest fee and highest return.  Its fees are 90% lower than the Dreyfus fund.

Dreyfus Tax Managed Growth Fund Class C (DPTAX) has a one-year deferred sales charge of 1% and ongoing fees of 2.10%.  It has generated an average annual return of 5.74% for 10 years.

Gabelli Asset Fund Class A (GATAX) has a front-end commission of 5.75% and ongoing fees of 1.36%.  It has generated an average annual return of 7.21%.

Dimensional Fund Advisors U.S. Core Equity 1 Portfolio (DFEOX) doesn’t have a sales charges but it does have an ongoing fee of .19%.  It has generated an average annual return of 8.88% for 10 years.

How do you know if you’re paying high fees?  Here are three ideas.

  1. Fee audit. A review of your investment holdings will highlight the amount of your fees you’re paying.  Your fees can be benchmarked to industry averages.
  2. Fund Comparison. Comparing funds side by side will allow you to make better investment decisions.  In addition to the fee structure, you can compare returns, holdings, asset levels, and management tenure.
  3. Advisor Fees. If you work with a Registered Investment Advisor, the fees are listed in their Form ADV, a public document.  RIA’s are regulated under the Investment Advisors Act of 1940 and they must disclose their fees.  Brokers and insurance agents aren’t required to disclose their fees.  If you work with a broker or insurance agent, you’re going to have to work hard to uncover the fees you’re paying.  An independent advisor can help you decipher their fees.

In a few weeks you’ll receive your 2017 year-end statements giving you the opportunity to analyze the fees you paid.  January is also great time to review your financial plan and investment goals.  Are your fees hindering your plan?

2018 could be the year you upgrade to first class and start working with an independent, fee-only, fiduciary advisor!

Wise men and women are always learning, always listening for fresh insights. ~ Proverbs 18:15.

 

Bill Parrott is the President and CEO of Parrott Wealth Management an independent, fee-only, fiduciary financial planning and investment management firm in Austin, TX.  For more information please visit www.parrottwealth.com.

December 13, 2017

Note:  Past performance is not a guarantee of future returns.  Your returns may differ than those posted in this blog.  Investments are not guaranteed.  Options involve risk and are not suitable for all investors.

 

 

[1] Morningstar Office Snapshot, ten-year return ended 11/30/2017.