Disclosure Form to Take to Firms & Advisors to Have Completed

OH……they may tell you they can’t complete it or why should you be asking but realize….it’s your money. Here’s a signed copy from my friends at Blue Ocean Portfolios who I have my own money invested with and who sponsor the radio network. This is why I use them and suggest people talk to them.
Blue Ocean Portfolios Signed Copy–Plain Language Full Compensation Disclosure Form

In today’s post on mutual funds I want to draw your attention to that sneaky little thing called ‘the fine print’. The crazy thing is, mutual funds love to talk about how great their returns have been but most investors fail to realize what the tricky wording actually means. We’re going to dig into that today.

Examining the Disclaimers and Clever Wording of Mutual Funds

Today’s example includes Columbia Management and their Columbia Select Large Cap Growth Fund, along with Schooner Funds Growth & Income mutual fund. As has been proven in research, including Worthless Warnings (Journal of Empirical Studies 2010) and Star Creation (Palmiter 2009), investors are mightily swayed by advertising focused on returns and star ratings.

To show you how dishonest funds cover themselves with legal disclaimers, let’s take a look at my two examples:

Schooner Funds Examined
Mutual Fund Decoding 101 High Future Costs

Schooner funds launched in August of 2008 as the market was plunging. What a prime time for a fund to emerge that promised to capture returns no matter what the market was doing. Who could resist that? Unfortunately, study after study has revealed that the only thing that matters is costs when it comes to investing since markets are efficient and 90% of the trading is done by institutions (mutual funds, pensions, hedge funds).

Consequently, a manager may experience luck or a mutual fund family may create the illusion of success, but at the end of the day the horse carrying the lightest jockey will win the race. Schooner conveniently post great returns in their ads by utilizing a ‘contractual waiver’ of management fees. What is a contractual waiver and how does it affect investors? Here’s the break down.

The Fine Print – By looking closely at the fine print of Schooner’s ads, you will see their returns are based on a management fee charge of 2% while the actual operating expense is 7.99%. This second amount is cleverly disguised because it is contractually waived until 8/29/11. By postponing that expense, the ad can claim the much lower, more attractive fee. Wait, there’s more! What you’ll also see is the sale charge of 4.75% that is imposed by financial advisors, also conveniently not factored into the advertised returns (unless you look closely at the part of the ad that spells those costs out).

This is just one of the reasons why advertisement and returns should NEVER be considered valid because of all the shady details and the impact of calendar days. Just imagine if the tracking period started on a day the market had a significant jump of 5% instead of a day when the market was down 5%. This is why Bill Miller of Legg Mason Value Trust, who was considered the smartest stock picker out there when the Wall Street Journal did a feature on him in January of 2005, said his success was actually 95% luck and it could have been vastly different if a different set of calendar days had been used.

Columbia Management Examined
Columbia Management Sept 2011 1 page Advertisement

Now let’s move on to Columbia Management. In a recent full page ad directed towards financial advisors, which appeared in Investment Advisor Magazine, Columbia focused on the incredible success of their Large Cap Growth Fund, an unbelievable 49% one year return!

Unfortunately, it actually is unbelievable. Here again the small print tells us what we really need to know.

1. The 49% fund return is a reflection of fee waivers and expense reimbursements, much like the Schooner Fund example shown above.
2. The recent growth in the stock market also helped produce short-term returns for some asset classes that are not typical, and may not continue in the future.

Can we be real for a moment? What they are really saying is this fund happened to hold some stocks that experienced incredible success, period. They know this pattern will not continue, but in the meantime they are going to make the most of it with huge advertising campaigns, while pushing advisors to sell the heck out of this fund!

Don’t Be Duped By Advertisements. Stick to the Proven Basics

So what can we learn? Believe nothing you read in advertisements for mutual funds or stock pickers. If they’ve done well we hear about them but what about all the losers out there? Every stitch of research has also shown that any winners will undoubtedly have their run of losing choices at some point in the future, so stick to the basics. Don’t gamble with your investment dollars.

Low cost index/ETF funds in a broadly diversified portfolio covering large, small, micro companies in the U.S. and internationally, commodities, emerging countries, value companies and treasuries.

Once you’ve got your allocation, stick with it through thick and thin. Turn off the news and realize markets are volatile over short periods of time but remarkably predictable over longer periods. Long term investments will pay off every time.

For more investment insights, be sure to take advantage of my two free resources, 7 Deadly Traps of Investing and The Six Pitfalls of Retirement Planning. They bring clarity to the most common investment mistakes and explain more about hidden fees, conflicts of interest, and how to avoid these pitfalls.

Ask yourself this question:
When you get gas for your car you know the price.  When you buy milk or potato chips you know the price.  When you see the doctor, you get a bill and know the price.  Upon completing and filing your taxes your CPA provides you with a bill.  If your car breaks down or you have an oil change, you know the price.  If you join a gym, you know the price.  When was the last time your Financial Advisor/Salesperson produced a bill or breakdown of their total fees to you?

Fact is, most investors have never understood how powerful this conflict can be to their wealth.  Protect yourself and demand to know the truth–It will set you free! The Financial Coach has provided a simple to use ‘FULL DISCLOSURE’ and transparency fee chart to present to your advisor.  Ask them to complete this in full and request that their supervisor also sign off on the document since in dealing with any firm you always want the chief people having the same level of committment as your investments and money.  In doing so, three things will happen: 1) They will gladly provide it and believe that you have a full right to know since it is your money, 2) Give you rationale why they “can’t” complete the form or 3) Try to ‘explain to  you’ their fees but not document them since verbal communication is always a he said/she said thing and subject to miscommunication (protect their butt!)

Obtain the PDF Form Here!
Full Disclosure Of Fees, Compensation and Other Fee Arrangements

Add in your comment and share your view.  Is The Financial Coach right on or is he off the reservation?

The compensation sheet you should have your advisor/broker/salesperson fill out describing all fees and costs
Fee Analysis & Total Disclosure of Compensation

Wall Street Journal: You should have timed the market and done opposite what the pro’s said

http://www.edwardjones.com/en_US/disclosures/rev_sharing/disclosure_information/index.html

http://www.edwardjones.com/groups/ejw_content/@ejw/@us/documents/web_content/web126980.pdf

So, Who the Heck Cares? Well I guess no one until you hear my example of a gentleman discussing how ‘he knows exactly when it comes in each year’–you see where I’m going I bet.  As he proceeded to tell all of us this wonderful insight I then asked a couple of pointed questions.  What you’ll see from my video are some key points that we need to learn that will  also help us in our investing and avoiding ‘gurus’ who tell us things that really have no idea about.