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Investing in mutual funds may
not be as attractive as it used to be! There’s an
industry-wide shift occurring that is certain to affect you.
Across the board, mutual fund companies are imposing
redemption fees. Whether you invest in no-load funds, big
funds, small funds through your 401(k), understanding these
changes is essential.
The year old ‘Mutual Fund Scandal’ exposed a number of
problems within the mutual fund industry. The crux of the
problem was the fact that mutual funds were treating large,
multi-million dollar Hedge-fund traders differently than
they treated their average investor. Some mutual funds
allowed these Hedge funds to move in and out of the mutual
fund quickly, often only remaining in the mutual fund for a
few days at a time. This has been referred to as market
timing.
The problem is that market timing it not illegal. The
problem occurred when the mutual fund stated in it’s
prospectus that it did not allow that activity while they
secretly allowed privileged investors to do it anyway. For
instance, large hedge funds would move millions of dollars
into a mutual fund one day and sell it out the next. This
gave the mutual funds increased fees while hurting the
return of their regular investors.
In response, the SEC has proposed a number of rule changes.
One rule would require mutual funds to impose a redemption
fee when a sale occurs within five days of purchase.
Unfortunately, many mutual fund companies have seen this as
an opportunity to impose new fees that make it harder for
you to move your money elsewhere. So the SEC’s involvement
has had the unintended effect of increasing costs and
reducing flexibility for the average mutual fund investor.
Many mutual funds, from big names to smaller funds, are now
creating redemption fees if funds are sold within time
periods much longer than what the SEC is suggesting. For
example, some Vanguard international funds impose a 2%
redemption fee if sold within 2 months. A few Vanguard
mutual funds have a redemption fee of 1% for 5 years!
Even if you plan on keeping your money in a mutual fund
longer term you can still be impacted. For instance, the
real-estate sector recently dropped 15-20% in just a few
days. If you had invested in Cohen & Steers Realty Shares
and wanted to protect your money by selling that fund, you
would have had to pay an additional 2% redemption fee
if it occurred within 1 year of purchase.
Worse, the big mutual fund ‘supermarkets’ are imposing their
own redemption fees. Charles Schwab One Source has begun
charging a .75% redemption fee for sales within 6 months of
purchase. TD Waterhouse charges .50% for sales within 90
days of purchase. Fidelity imposes a $75 fee or .75%,
whichever is greater, if the redemption is done by phone
within 6 months of purchase.
Interestingly, Fidelity does not impose a redemption fee on
Fidelity’s own mutual funds! This begs the question—if
short-term trading is so bad then why doesn’t Fidelity
impose the same redemption fees on Fidelity mutual funds?
The bottom line is that redemption fees cause you to lose
flexibility. Let’s say unexpected events, good or bad, cause
you to need premature access to your money. Or maybe you
just need to adjust your portfolio. Worse yet, what if we
have another terrorist attack a few months down the road?
These new fees mean you’ll have to pay a penalty to access
your money.
The financial services industry’s goal is to reduce their
costs and increase client retention by making it harder for
you move your money elsewhere. My goal is to manage my
clients’ money in such a way that protects what they’ve
worked so hard to acquire without limiting their
flexibility.
That’s why I will be moving my client’s money away from
mutual funds over the next month or so. It is no longer in
their best interest to remain in mutual funds. Instead, I
will be utilizing Exchange-Traded Funds (ETFs). They offer
wonderful diversification, flexibility and low transaction
costs. Plus they can be sold at any time during the trading
day, a terrorism protection that mutual funds can’t offer.
For clear, straightforward, unbiased answers to your
financial questions submit your questions to
www.guardingyourwealth.com/askjeff.htm..
Mr. Voudrie is a Certified Financial Planner, nationally
syndicated newspaper columnist and President of Legacy
Planning Group, Inc., a Private Wealth Management Firm in
Johnson City, TN. He can be reached toll-free at
1-877-827-1463 or
www.guardingyourwealth.com. |
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