February 28, 2011

Mutual Fund Wholesalers

Most people do not know about a very uncomfortable relationship, one that crys out for conflict of interest.  It is the relationship between your stockbroker / financial advisor and mutual fund wholesalers.

Mutual fund wholesalers make money by promoting the fund family that he/she represents to stockbrokers / financial advisors.  The more dollars that flow into that fund in a certain territory, just like any other salesman, the more money they make (and thats fine if you are selling widgets but not financial products).

Wholesalers will often offer incentives to stockbrokers / financial advisors in the form of higher commissions, sponsored events, etc, to have that stockbroker sell a particular fund to their clients.

Worst of all, wholesalers usually report a bump in sales at the end of every sales period or commission month proving conclusively that stockbrokers / financial advisors are not necessarily looking out for your best interest. 

Many stockbrokers I worked with would hold on to cash to wait and see which wholesaler / fund family was offering them the best incentives that particular commission month and then park client money there. 

It is a very unsavory relationship yet it continues to thrive.

The best way to know that all investments are made in your own best interest is to invest by yourself and for yourself.

February 15, 2011

An Old Stockbroker / Financial Advisor Trick

Ok, the goal of any stockbroker or financial advisor is to get your money under their control and take a percentage off the top for 'managing' it.

An old trick that stockbrokers consistently use is to do that is to show you their own returns or mutual funds returns that 'outperform' the averages over a certain period, maybe last year, last three years, etc.

It looks great on paper, wow, this mutual fund has beat the index over the last three years so you need to buy it now (and oh, btw, I need some more commission).  They will always show you exactly what makes that investment look the best and no more.

The problem is that to beat an ETF or fund that tracks an index, a mutual fund will have to take on more risk or have wild swings because no one or mutual fund can beat an index more than a few years in row.  All you need to convince yourself of this is compare using a yahoo chart.  Compare American Funds Growth Fund of America (agthx) and VTI which is an vanguard etf that mirrors the S&P 500.  No surprise, VTI wins consistently and this is no slap in the face to the good folks at American Funds or the financial advisor that is trying to sell it to you.  Its just impossible to beat the house and the house is the index itself!

Remember that indexes outperform people who try to outperform them consistently, around 90% of the time, largely because of fees.  The reason it isn't 100% is because every year, you will have some who are fortunate enough, lucky enough to pick correctly, remember, the monkey who beat the S&P500 a few years ago BUT by the time you hear about it, its too late and the next few years are pretty much guaranteed to regress back to the averages and you have spent more money and time chasing returns :(

So don't fall for it, its a trick but you already figured that out :)