Hear Ye, Hear Ye, Read All About It

By Bob Moeller
WEAC Member Benefits

December 2004

Financial Planning Seminars
Achieving Financial Independence

I read a lot of financial publications as part of my job, and I will occasionally, in my seminars, refer to something I’ve read. As many of you know, I firmly believe you should be well informed when making financial decisions, and I hate to see members get ripped off. So I thought I would review for you the headlines of some of the articles I’ve read this year along with a brief explanation of what to watch out for.

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FEE ACCOUNTS FACE SCRUTINY BY REGULATORS
(Wall Street Journal 10/5/04)
This article deals with a growing problem of brokers convincing investors that they are better off paying an annual fee (usually 1% or more) than simply paying commissions. In fact, my individual meetings with thousands of members have convinced me that almost no members benefit from this type of arrangement. You would have to do a lot of stock trading to make it pay off. In some cases, this will be presented as the broker “managing” the account. When I was a broker many years ago, this type of managing was simply a part of what a broker did in return for regular commissions. I remember meeting with a member a couple of years ago who had just inherited about $400,000. It was residing in a brokerage account invested almost entirely in mutual funds. The member did little or no trading and did not expect to do a lot of changing in the mutual funds other than an occasional re-balancing. He was paying $4,000 per year in fees. The lesson for you is to not agree to annual fees unless you know exactly what you are getting for it and conclude that it is worth the cost.

• • •

HOW VARIABLE ANNUITIES CAN GNASH INVESTORS
(Wall Street Journal, date unknown)
This is a basic lesson on how high fees (the average is more than 2% per year), withdrawal charges, salesperson-induced churning, etc., means bad news for investors. The lesson is to never buy variable annuities. Note: this article was not referring to 403(b), tax-sheltered annuities, although if they are from life insurance companies, they will have similarly high fees.

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FINANCIAL PLANS: SELLING FOR IN-HOUSE GAINS?
(Wall Street Journal 2/9/04)
This article lambastes American Express Financial and similar companies for preparing financial plans for clients for a fee, and then making sure those plans recommend mainly mutual funds that pay the broker the highest commissions. The lesson for you: be very cautious about committing to a financial plan, especially if it is prepared by a commissioned agent.

• • •

SALE OF LIFE INSURANCE PROBED
(Wisconsin State Journal 10/13/03)
This article deals with questionable sales practices used by Northwestern Mutual Life Insurance to sell variable life insurance products to investors. It mentions that the National Association of Securities Dealers (NASD) – which regulates firms – was investigating Northwestern sales practices and was looking for buyers willing to testify. The lesson for you: don’t ever buy variable life insurance; the fees and withdrawal penalties are much too punitive.

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WHY A BROKERAGE GIANT PUSHES SOME MEDIOCRE MUTUAL FUNDS
(Wall Street Journal 1/9/04)
This is the story of how Edward D. Jones & Co. – with 5.3 million customers – essentially trains its brokers to sell only funds from seven mutual fund families that have “kick-back” type arrangements that could top an estimated $100 million per year. The lesson to you: don’t buy “load” mutual funds; go with “no-load” funds from top-rated fund families such as Vanguard, Fidelity, Thompson -Plumb, and T. Rowe Price. By the way, if you hold an insurance company tax-sheltered annuity, you may see names in the sub-accounts like Fidelity. These are not mutual funds but funds managed by Fidelity for the insurance company, and these do not prevent the insurance company from tacking on high fees.

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The overall investing lesson is that you should read a little about money every month; be very careful whom you trust; and become knowledgeable about your money, what it can do, and what it costs you to do it.

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Are there subjects you would like to see covered in this column? Let me know. I can be reached by e-mail at: moellerb@weac.org.

Posted November 19, 2004