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Do Mutual Funds and Financial Advisors Really Do Anything?
By Ronald Peck
Mutual funds make it appear they exist to grow your money. The reality is quite different. They need your money to grow their shareholders' money. There are multiple proofs of this. Read on to learn how they are doing it.
The second part of the conflict of interest that I see in the industrial investment complex (that's what I call the combination of fund managers, financial advisors, regulators and legislators), is what I call the economies of risk scale. As already outlined in a previous article, because they're publicly traded, their allegiance is to share price. Here is how the economies of scale work: If you manage a mutual fund, and if your mutual fund is, say, $1 billion in size, well, it doesn't cost you 10 times more to manage that mutual fund than it does if your mutual fund was, say, $100 million in size. Yet, the fees per dollar invested stay the same. In fact, their fees should be falling, because it just doesn't cost as much to manage a billion-dollar fund as it does a 100-million-dollar fund.
Another part of this is that there used to be a fund manager managing one fund. That's no longer true. Now fund managers work in teams, teams that manage multiple funds, maybe even dozens of funds. So the managers are cutting their expenses even more as their assets under management grow. If a real fiduciary relationship existed, their bills as a percentage of assets would also decrease. But their percentage never goes down. Less expense with more money under management always equals more profits. Because the investor is no longer first, the shareholder is. The investor is on his or her own; they just don't know it. The need to pursue profits of the fund family overwhelms responsibility to the investor. That's simply what the fund managers are paid to do. Since management fees are based on assets under management, it just makes sense that assets under management become the focus of the fund company, from the lowest clerk up to the CEO and board of directors.
Managers are people and marketers are people, and so naturally, their alignment is to their income and to their wealth. This means their attention is on the kind of short-term gains called "assets under management." "Get more money to manage" becomes their mantra. This is how the system works. More fees beget higher profits, which means a higher evaluation of the stock, which means a higher stock price, which means either a higher buyout or higher options with more profit in the options, which leads to very rich shareholders.
If there are board members and directors and C level people and managers with thousands, or tens of thousands, or hundreds of thousands in stock options, their allegiance will be to the share price and not the investor.
None of this has to do with growing and protecting the money, not one cent. While their job is to appear to grow and protect your money, it's really not. The more the fund managers appear to be doing something for you as an investor, the more they're really doing something for themselves. The fund managers do their real job so well so they can get the most out of this great investment opportunity. It's just not the investment opportunity of your lifetime, but theirs.
RC Peck, CFP®
Registered Investment Advisor, Founder of Fearless Wealth
Investment Education for Successful Professionals.
http://www.fearlesswealth.com
With over 20 years of investment success, RC Peck is a Certified Financial Planner, Registered Investment Advisor, and an NLP Practitioner, which means he knows what you should do to grow your money and how to get you to do it.
RC has recently released a special report called, "29 Minutes to Investment Success," which outlines "One Tool" that causes mutual fund managers to tremble and stockbrokers to weep with fear.
Discover how the "One Tool" can revolutionize your investments today. Click here to get the "One Tool" http://www.TheStockMarketStrategy.com
Article Source: http://EzineArticles.com/?expert=Ronald_Peck
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Your Financial Advisor is Biased by Their Wallet
By Ronald Peck
When you work for a company, you do what the boss says. When you're told this is how to make a living, you do it. When you're shown how the top earners made it big, you go for it. Who can knock success, right? But your financial success depends on your attention here, because your financial advisor's best interest may not be what is best for you.
I want to give you an idea of the type of money that changes hands between fund family companies and financial advisors. Fund companies spend billions of dollars on financial advisors in the form of straight pay outs, fees, commissions, entertainment, trips, 12B-1 fees, direct brokerage fees, pay-to-play fees and supermarket funds fees. These companies would not spend billions of dollars if it weren't effective.
Financial advisors take these payments because it's just how most of them make a living in this industry. Financial advisors aren't dummies; they sell what pays the most, and not necessarily what is best for their client.
I am going to give an example of a financial advising company, just to show this point. There are many publicly traded financial advising companies. You shouldn't work with any of them, just like you should only buy actively managed mutual funds. The exemplar company is called Edward Jones. They sell mutual funds to their investors. They're not publicly traded, so they rank OK on that score. But the same forces are at work, and the general partners who are senior investment reps and other owners of the company take the place of the stockholders in a publicly traded company. Most people know them as financial planners or financial advisors. But what they may not know about this company is that they have a preferred list of the fund families that they promote. To be on that preferred list, the fund families have to pay dearly in fees and commissions.
When their employees go through training, they're only introduced to these seven preferred mutual fund groups. This company even goes so far as to discourage their employees from contacting other fund companies from outside the preferred list. In fact, employee bonuses are linked to the selling of the preferred list.
In 2004, this firm got caught, along with other financial investment companies. They had collected $300 million in secret payments. And 95 % of the time, they sold mutual funds on their preferred list. Because the company didn't disclose relationships with the preferred list, they had to pay upwards of $75 million in fines to reimburse investors. However, they got paid much more than what was given back to their investors. To put this in perspective, in 2005 alone, after the settlement of $75 million, Edward Jones received $172 million in revenue sharing fees from their preferred seven fund families. That was one-third of their pretax income. A third of their income comes from these fees.
That isn't objective or unbiased. It's not proper behavior for a fiduciary. All these years after the litigation, on their website they state, "We focus on the individual investor, not big corporations." In fact, this seems even worse, because their reps are right there in the communities they sell to. Even with these small offices based in local communities, profits were more important than their clients, which would demonstrate that the focus is on their owners and on profitability.
If you're planning to work with a financial planner, work with one who dies bit work for a publicly traded company - or a company that acts like one - because there's less likelihood of getting unbiased, objective advice. Also important to know is the kind of research that financial advisors do, because it, too, is presented as objective evidence that will make you more money. But for whom does this really make more money?
RC Peck, CFP®
Registered Investment Advisor, Founder of Fearless Wealth Investment Education for Successful Professionals.
http://www.fearlesswealth.com
With over 20 years of investment success, RC Peck is a Certified Financial Planner, Registered Investment Advisor, and an NLP Practitioner, which means he knows what you should do to grow your money and how to get you to do it.
RC has recently released a special report called, "29 Minutes to Investment success," which outlines "One Tool" that causes mutual fund managers to tremble and stockbrokers to weep with fear.
Discover how the "One Tool" can revolutionize your investments today. Click here to get the "One Tool" http://www.TheStockMarketStrategy.com
