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529 Plans – NOW they tell me!

July 20, 2009 By Leave a Comment

There are two other posts with regards to 529 Plans on this site. Those articles talked to the dangers of investing in these types of plans. The link below is of an article that just came out today from Investment News.

What does it tell you about these plans when FINRA has doubts as to how they are being managed and sold to investors?

By the way, the Investment Company Institute has reported the total dollars in Massachusetss 529 Plans at the end of December 2008. If you don’t remember the statistics in prior years, they are below:

2008       $2,272.4 Million                               MEFA  commission (15 Bps) $3,408,600.00

2007       $2,820.0 Million                              MEFA commission (15 Bps) $4,230,000.00

2006       $2,349.0 Million                              MEFA commission (15 Bps) $3,523,500.00

So the Massachusetts Educational Financing Authority received over $10,000,000.00 in commissions from 529 plans for the years 2006, 2007, & 2008. According to the Fidelity Investments Mutual Fund Guide Special 2008 Year-End Issue (p.478), the 3-year return for 529 plans for the Commonwealth of Massachusetts Plan had the following returns:

3 Year Returns for Aged Based Portfolio:

2009       2012      2015      2018      2021     2024

-1.32      -2.43      -3.84      -5.88     -7.53     -8.90

Question: If MEFA, “a non-profit self financing state authority,” is receiving commissions from the sale of financial products, could they also be held accountable for the losses created by the sale of these products? After all, based upon the returns of the plan, the only entities to make money from these plans were MEFA and Fidelity Investments!

Question: If MEFA was created by the state legislature “at the request of Massachusetts colleges and universities,” are these same universities now culpable for losses? Or at the very least, are they planning to lower their tuition and fees to the paticipants of the plan based upon the FINRA stance?

The “age-based” portfolios obviously have not accomplished what they were designed to do.

Filed Under: Fiduciary Foolishness, Investing Misconceptions

Health Reform’s Savings Myth

June 1, 2009 By Leave a Comment

The following is from the Washington Post, not necessarily the venue that you would find an article like this but very much worth a read. Thank you Greg Mankiw’s Blog for this find.

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Annuities and Guaranteed Income

May 14, 2009 By 1 Comment

After many attempts to refrain from making comments about the state of financial services companies in today’s market environment, an advertisement on CNBC struck me as being worth a more definitive look. Not long ago Mark Cuban in his blog wrote a story about Fidelity Investments guaranteeing income to its clients through the use of its own annuity product. This product would potentially provide income for life for the holder of the policy. Soon after Mark’s article Fidelity Life Insurance Company pulled the plug on their product. They would no longer offer this product to their clients. However, today I noticed that a television ad promoting the benefits of guaranteed income from Fidelity Investments was on the air. How could this be? Didn’t they decide to pull this product from the market? Surely this is some sort of oversight and it will be corrected quickly!

But nothing is as it seems at Fidelity anymore. After jotting down the 800 number to call about more information, I called Fidelity to find out that yes indeed they were offering the product and would I like to learn more about it?!!!! The representative that I talked to explained that Fidelity was offering this guaranteed income product, but it’s not Fidelity’s product, it’s either Mass Mutual’s or John Hancock’s. This seemed odd so I asked, “Why wouldn’t I buy the product from those companies rather than Fidelity?” The answer was an interesting and confusing one. The representative explained that, “unlike the other insurance companies we are not paid to sell insurance or annuities so Fidelity through their buying power cuts a deal with the other insurance companies to offer the product at a better price than what they can because we don’t have to pay agents their commissions. This means our rates are better!”

Really?

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Investment News

April 21, 2009 By Leave a Comment

This piece from Investment News is definitely worth a look…..

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Mutual Fund Expenses 1980-2007

April 21, 2009 By Leave a Comment

The following information is available on the ICI website .

What is interesting to review is that stock fund expenses have been going down since 2002. What is not readily discerned is to what degree the entrance of index funds with extremely low fees and large asset bases has affected these costs.

Charles Carroll Financial Partners provides a living financial plan and professionally managed assets for individual investors in line with the expenses of stock mutual funds shown below.

Figure 5.1
Fees and Expenses Incurred by Stock and Bond Mutual Fund Investors Have Declined Since 1980
(percent, selected years)

Figure 5.1
Fees and Expenses Incurred by Stock and Bond Mutual Fund Investors Have Declined Since 1980
(percent, selected years)

Stock Funds1

Bond Funds1

1980

2.32

2.05

1990

1.98

1.89

2000

1.28

1.03

2001

1.24

0.97

2002

1.25

0.94

2003

1.22

0.95

2004

1.18

0.92

2005

1.10

0.87

2006

1.06

0.82

20072

1.02

0.79
1asset-weighted average of annual expense ratios and annualized loads for individual funds
2 Data are preliminary.
Sources: Investment Company Institute; Lipper; ValueLine Publishing, Inc.; CDA/Wiesenberger Investment Companies Service; © CRSP University of Chicago, used with permission, all rights reserved (312.263.6400/www.crsp.com); and Strategic Insight Simfund
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Updated 529 Plan Information

April 21, 2009 By Leave a Comment

The Investment Company Institute website reveals the following information about 529 Plans:

Assets in Massachusetts 529 Savings Plans:

2002     $704 Million

2003     $1.150 Billion

2004     $ 1.557 Billion

2005     $ 1.907 Billion

2006     $2.349 Billion

2007     $2.820Billion

As of 4-21-09 the ICI does not list a valuation for year end 2008. What is important to note is that the 15 basis point fee that the state received for “managing” these assets came to $4,230,000.00.

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The Sales Process of Proprietary Mutual Fund Management Services

April 21, 2009 By 1 Comment

Most proprietary mutual fund management products make sure that they hide the fundamentals of what they are doing with your money in the symbiotic synchronicity (otherwise known as jumbled junk) of their portfolio methodology. The best manner to do this is by making sure that there are at least two sales people at a meeting with you when you are making the investment management decision. Management’s hope is that you just won’t be diligent enough to read the prospectus for each fund that underlies their investment process. Instead, the marketing minions of the firm fill your head with a methodology that seems to be unassailable in its concepts, theories, and philosophy. After all, they manage $50 gazillion dollars this way, why would anyone in your position question a firm of this stature! Instead of having discussions of what the individual funds have done in the past, you are having a conversation centered on how the building of the portfolio incorporates the insights of a host of professionals giving you their best ideas. At this point, thoughts of Fergus Shiel, Harry Lange, or Bob Stansky taking control of your portfolio and deftly maneuvering your money through the storms of recession, fill your head. Get a grip! Those three money managers don’t have a clue who you are or what your needs are. If you are lucky, their funds might be a part of the money management process that you are about to embark on, or more likely, their funds are not even in the proprietary money management program that you are considering. Why? (We’ll get to that another time.)

You go to your fund company’s web site and look up the particulars of your mutual funds. You want to be prepared for the sales process. Specifically, you read the information associated with the “strategy” that is employed with the fund or funds that could be part of your portfolio. Here is where most people start to get that glazed eye look. If you were to look at the equity funds of your firm, you might find that many of the funds have the following “strategy” that delineates the process of managing your assets:

Normally investing at least 80% of assets in equity securities.

No big deal, until you start to understand the implications of this statement. “At least” should start to scare the pants off of you. This phrase could also be stated in a different way, “no less than.” So if you happen to be in a bear market environment, at what level will the funds in your portfolio reduce their invested equity level to? So all of a sudden you start to see that the protection of having your assets managed is somewhat mitigated by the underlying prospectus of each fund, but we decided to forgo the simple process of “reading the prospectus,” in favor of the “methodology.” (The methodology is ethereal and acted out quite nicely by the two representatives usually used in the sales process making sure that you don’t get too inquisitive.)

Anxiety has now overwhelmed your sense of well-being. However, two talking heads are now chirping that you are paying the advisory fee to take care of this very situation. Should there be a market correction or downturn, your asset management advisory fee will be in place to pay the people overseeing your account to take action and correct any flaw in their methodology. Whew! That’s a relief! Just knowing that you’re covered in these events is worth the fee, glad these two guys were here to explain it. But wait! Do I really understand what it is that I have acquiesced to? And that fee that they discussed is that different from the management fee on the fund?

You return home confident in your decision to have your assets managed, a month passes, and you pick up the paper to see that the market is down 300 points. You are concerned and call your new contact; obviously the old contact didn’t have the necessary credentials to handle such a lofty task as managing your assets, so they have assigned you to another loftier individual. Once you have been able to contact that loftier individual, and explained your concern, their answer is that you are not scheduled to be reviewed for at least another fortnight. She is sure that you read the brochure and marketing material that stated that the investment professional on your account periodically reviews your account and adjusts accordingly!  However, we can’t arbitrarily review an account that is in line with our methodology and timetable until a fortnight arrives. Your asset allocation is in line with expectations, and the investment deities would rise up in conflagration should a change be requested at this point. “Do not be concerned,” the loftier individual has said. “We had a meeting earlier today and have taken measures to insure that your account is placed at the top of the next fortnight’s review. It will be at that time that your assets will be reviewed, to insure that they are in line with our expectations of what the market is doing.”

At this point you return to your chair and realize that your money is no longer yours, it is part of the great methodology.

Large asset management firms can not give the individual attention that clients expect. The process that they employ is always one where one size fits all. It is only when the asset level of the client reaches a certain level that even the smallest of accommodations are made to the client. The money management process that is employed above is meant to strengthen shareholder value not client net worth.

The fees you pay to the management firm steering your investments should allow you access, consideration, and feedback. We believe we have a better idea of interacting with clients and managing assets. Please visit our web site, www.charlescarrollusa.com, or contact us about our offerings.

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Quite a Run for Mutual Fund Investing

April 21, 2009 By Leave a Comment

Mutual Fund investing has had quite a run since 1987. According to the Investment Company Institute, the mutual fund industry’s national association, mutual funds held $5.5 Trillion in client assets at the end of 1998. These assets were held in over 7,300 mutual funds.

The growth the mutual fund industry continued to blossom through the turn of the century and at the end of 2007, individual U.S. clients held over $12 Trillion in mutual fund accounts, an incredibly large sum of money. These assets undoubtedly have placed strains on the industry as it has had to build the infrastructure necessary to oversee the proper accounting, client management, marketing, and sales operations associated with these funds.

The Investment Company Institute in its 2008 Investment Company Fact Book, (www.icifactbook.org), goes to great lengths to explain that the cost associated with mutual funds has been going down for some time. When discussing the downturn in fees the ICI uses a fabulous chart that reflects costs going back to 1980. This chart reflects how these costs have gone from 2.32% in 1980, to an average of 1.02% today. This is an astounding decrease and one that you might feel would be in line with the substantial increase in mutual fund dollars. Closer scrutiny of this chart reveals that since the turn of the millennium costs have gone down from 1.28% in 2000 to 1.02% in 2007, But wait…..the news from the ICI gets better. The ICI states that large mutual funds tend to have lower-than-average expense ratios because of economies of scale. The larger the dollars in the fund, the lower the fund cost to the investor. This should be great news for the investor, expenses are going down, economies of scale kick in, and less expense is taken from the asset base by the manager of the fund.

However, the comment by ICI with regards to economies of scale doesn’t work out the way you might think. At the end of 1999 the industry had $6.85 Trillion in mutual funds, by the end of 2007 this had ballooned to $12 trillion. So let’s do some math. If we use the $6.85 Trillion in assets at the end of 1999, with the 2000 expense ratio, per the ICI, of 1.28%, the industry took in over $87 Billion in fees in 2000. By the end of 2007, the fees from mutual funds delivered over $122 Billion in revenue to the industry for the 8,000 mutual funds. Total revenue for the industry rose a compounded average annual rate of 4.25% from 2000- 2007. Now let’s look at what was happening in the marketplace. The S & P 500 stood at 1469.25 on December 31st, 1999. On December 31st, 2007 the S & P 500 stood at 1468.36. During this 8 year period the S & P 500 was flat. Investors in equity funds tied to the S & P 500 or similar indices might not have seen substantial change in their investment dollars but the total fees raked in by the mutual fund companies increased nearly 40%.

Why is this important to our clients? If you are still investing in mutual funds we believe it is time to look at lower cost alternatives that can provide you diversification, tax advantages, and current market pricing. We believe that we can provide a service that will lower your overall cost of managing your portfolio through efficient management fee savings. Shouldn’t the fees that you pay to have your assets managed actually provide you added value not just the pockets of your mutual fund company?

By the way, the ICI goes on to say that at the end of October 2008 total mutual fund assets had fallen to $9.6 Trillion from $12 Trillion at the beginning of the year. How do you think the industry will recoup the lost revenue from the downturn in assets, lower fees?

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529 Plans – What you don’t know and wish you didn’t

April 21, 2009 By Leave a Comment

Fidelity Investments has created target date investment plans so that you may save for college for your children, family, friends, or yourself. These plans allow you to invest your savings in the hopes of benefitting from their auspicious investment management expertise, so that through their guidance, your contributions will be available to you when they are needed for college. You may choose to invest your funds based upon a target date that your child will enter college, and these portfolios are currently based upon 3 year time frames with the first target date portfolio set at 2009.

The following outlines how you probably think of a 529 plan.

Once you have contributed to the accounts the manager of the plan invests your contribution into the underlying mutual funds based upon an asset allocation tied to the date you have chosen to retrieve your funds. The mutual fund managers then take your contribution (I call it a contribution based upon what happens while it is there) and invest your contribution into individual equities, bonds, and cash or cash equivalents. The manager of the fund makes a determination of what to buy or sell based upon their own personal bias or prescience. In any event you now have your money with some of the most skilled professionals that Fidelity could find.

This is when you should start to get uncomfortable based on what’s coming.

In these target asset allocation funds, there may be no less than 15 individual mutual funds. So what! That will mean that I have 15 of the finest managers on the planet insuring my success! Well…..these individual managers don’t sit around a table and discuss the little tike’s college fund, they have more pressing needs on their minds. You see the Blue Chip Growth manager is managing for ALL of his shareholders based upon the prospectus that guides his asset allocation. By the way, you’ll see that the Blue Chip Growth fund must invest at least 80% of its assets in equities, AT ALL TIMES. But no need to fret, the Disciplined Equity fund must invest at least 80% of its assets in equity securities, AT ALL TIMES. In fact, of the 9 Fidelity mutual funds shown in the Fidelity mutual fund guide for year-end 2008, 8 of the equity funds listed on P.478 that allocate contributions for the plan, are required to have at least 80% of their assets invested in equities, AT ALL TIMES. Only the Growth Company fund does not have this requirement. The College Investing Plan Fact Kit is quite an interesting read. It can be found at:  http://personal.fidelity.com/planning/pdf/ma_cit.pdf and it outlines these facts. So while you are off running errands and looking after dinner for the family, and the market is crashing, no one is trying to make sure your money isn’t. Why? Because the equity funds are suppose to have at least 80% of your assets invested, AT ALL TIMES.

Let’s say you just sent in a contribution to your 2012 target asset allocation plan. You probably expect that the 529 plan manager will invest your 529 contribution for you. You are probably thinking that Fidelity determined which funds to purchase, and that they are placing a small percentage of your contribution into an assortment of many Fidelity mutual funds. Right? Well not exactly. The money goes into a giant pot that is called the 2012 target asset allocation 529 plan (or trust). The manager (trustee) of the plan makes the decision which mutual funds to use in the plan and the portfolio allocations. The decision of which funds to use seems to be somewhat static. By the way, the state of Massachusetts is making that decision, not Fidelity, and least I forget, they take 15 basis points per year, on the assets in the accounts, as the fee to trustee this operation. (Some might call that a tax but I won’t, besides, I’m sure that the trustees are finding ways to spend the money to foster more money going into 529 plans) However, the state of Massachusetts does not back the investments in the account, nor do they promise that the account will increase or won’t decrease.

This is when you should start to sweat profusely. (I’m pretty sure that you thought Fidelity made that decision)

There is an eventual allocation of the giant pot into the 15 various mutual funds so that everyone that owns the 2012 target asset allocation 529 plan is invested in the underlying funds. However, you will find in the Participation Agreement for the 529 Plan that you actually own units not shares, even though your statements say shares. No big deal, it just makes the accounting a whole lot easier and reduces the expense of trying to deal with so many people wanting to invest in the 2012 target asset allocation 529 plan. One thing you should know though, the units are not registered with the SEC or any other state securities commission, and oh yeah, the portfolios are not mutual funds. You see each portfolio is like a fund of funds. Thus it reduces costs and those savings are passed on to you. (Really?) So instead of worrying about everyone, they can manage one giant pot of money devoted to the 2012 target asset allocation 529 plan and then just make accounting entries for you to see your portion. You see these plans are custom strategies, or so says Fidelity’s 529 College Planning Group. So they have developed this custom strategy for the little tike. Heaven knows what all the rest of the $400 million that’s in the pot is for!

Finally, let’s get back to the decision that the state of Massachusetts makes in making sure the right funds are in the plan. For brevity’s sake we’ll only look at the funds that are invested in equities. According to Fidelity’s Mutual Fund Guide of Year End 2008 there are 9 Fidelity equity funds in the 2012 plan. The following chart displays their Morningstar ratings and their asset levels over different time frames.

Morning star Rating                        Assets in 2003                    Assets in 2008

Blue Chip Growth                                            3 stars                                   $22.3 BB                               $8.6 BB

Dividend Growth                                             2 stars                                   $18.1 BB                               $5.3 BB

Equity Income                                                   2 stars                                   $23.5 BB                               $17.3 BB

Equity Income II                                             2 stars                                   $12.2 BB                               $5.1 BB

Disciplined Equity                                             3 stars                                   $3.9 BB                                 $9.0 BB

Growth Company                                            4 stars                                   $22.6 BB                               $21.5 BB

OTC                                                                        3 stars                                   $7.9 BB                                 $3.2 BB

Small Cap Independence                              3 stars                                   $949 MM                             $1.20 BB

Lg Cp Core Enhanced Index                         N/A                                        N/A                                        $862 MM

Of the 9 funds only 1 has a rating of 4 stars or higher, and if you don’t know, the highest rating is 5 stars. Of the 9 funds, 3 have shown increases in assets since 2003. This would be fairly remarkable given the market’s plunge, however, one of the funds is new and has a majority of the different 529 plans money as its primary investment. The other 2 funds have negative returns for the 5 year period 2003 through 2008 according to the mutual fund guide from Fidelity for year-end 2008. The average rating on funds, for those funds that have ratings, comes in at a resounding 2.75 stars, not exactly “stellar.” Are these the best managers that the state of Massachusetts could find? Hey! So  when do we talk about returns?

Here is where you start breaking things.

Fidelity offers many different types of plans. Some are conservative, some are aggressive, and some involve money markets or treasuries. There are 26 different plans to chose from so you would think that one might be the custom fit that you are looking for, but wait, 16 of the 26 different plans are showing negative returns since inception! This means that on those sixteen plans Fidelity and the state of Massachusetts were paid from your contributions to watch over your investments while the contribution that you made lost money. http://personal.fidelity.com/global/search/inquira/resultsindex.shtml?question=529%20Plans

In essence this is a passive management program masquerading as an actively managed, customized, tax deferred, college savings plan. It is passive for it does not make decisions to reduce the asset allocation until time passes. As long as the market is going up you win, they win, life is rosy!  However, when the market retreats, and the allocation to equity securities falls only to a minimum level of investment in equities, you lose, your intended beneficiary loses, and Fidelity and the state of Massachusetts receive their fees.

So what do you do?

Here is an excellent article from Bankrate.com that might help you at least secure some tax advantage if you have had tax losses from your investing in 529 plans.  http://www.bankrate.com/finance/college-career/529-plan-moves-to-make-now.aspx. More importantly, you should rethink the process of investing for college. Meet with a financial planner and have them educate you on costs, investment options, tax liabilities, and alternatives for saving for college. Make sure that the financial planner is a CERTIFIED FINANCIAL PLANNER. If you use them they have a fiduciary responsibility to you. This is an important distinction that is to your benefit.

529 Plans might be the way to go for you even considering the information above. But for many, they are finding out too late that what they thought was a “smart move” turned out to be just that, just not for the intended beneficiary.

Some other articles of note that you should consider:

http://www.bloomberg.com/apps/news?pid=20601103&sid=afmB.7qR9z2M&refer=us

Filed Under: Fiduciary Foolishness, Investing Misconceptions

It's Guaranteed!

March 31, 2009 By Leave a Comment

Mark Cuban may not be someone you would want to emulate but he had an unusual posting on his blog the other day that should be mandatory reading for Tim Geithner at al. It had to do with guarantees. Mark was reading the New York Times and saw an ad from Fidelity Investments that promoted “guaranteed income.” His post on blog maverick of March 9th, is worth a second look. Mark was able to discern that Fidelity was offering the American public an insurance product that would guarantee that your income from that product would never run out. Coming from the bastion of integrity, fairness, and no loads this should be a layup for the American consumer, but Mark found one disturbing point that the ad didn’t want you to understand. There was a qualifier to this ad, the qualifier stated, “Guarantees are subject to the claims-paying ability of the issuing insurance company.”
Hey! This is a Fidelity ad! This isn’t Baldwin United, this is Fidelity! Certainly the claim that is made will be backed by Fidelity in times of trouble? However, this may not be the case. It seems that Fidelity might have an underlying insurance company purchase the annuity, that they might find themselves in trouble and then alas, your annuity would no longer be guaranteed. Where is Cuomo when you need him? Has Fidelity found its way down to the depths of the rest of the thundering herd of financial services companies that play shell games with client money? Not Fidelity!

But something has changed at Fidelity.

Is this the tip of the iceberg? What other things that we take for granted are not as we think them to be about Fidelity? Soon after this ad ran in the New York Times Fidelity Life Insurance Company decided to no longer offer the product to it’s clients. The impact of Mark Cuban’s blog may not have anything to do with the decision that Fidelity made with regard to this financial product, but one thing is sure, the clients that are currently in this product that have experienced significant erosion of their capital over the past 18 months are not sleeping as soundly as they may have before Fidelity pulled the plug. On a side note Mr. Geithner, there are only two guarantees in life, death and uh….well in your case maybe only one.

Filed Under: Investing Misconceptions