May
An Investment With A Guaranteed Loss
Written by Leo FranklinBloomberg recently published an article called “The Worst Deal in Mutual Funds Faces a Reckoning.” The article begins, “Imagine an investment that is guaranteed — at least initially — to lose you money. Such an investment was once quite common and still exists: the front-loaded mutual fund.
To buy into such funds, investors pay as much as 5.75 percent of their initial investment in a load charge. That $40,000 you wanted to invest? It instantly shrinks by $2,300.”
What is a “load fund”?
Load funds have long been a staple of the financial planning industry. The rationale to support the immediate loss is that the planner deserves to be compensated for their advice. The truth is that they receive trailing commissions for as long as you hold your funds, and that compensation could be significant in and of itself, never mind an additional percentage-based up-front fee.
A mutual fund is an investment vehicle that invests pools of money from thousands of investors into a batch of securities or other funds. Funds that charge up-front, percentage-based fees are “loading” the initial cost onto the investors – hence the “load fund”.
These funds also claim that the steep fees help to impose discipline on investors. This argument is that investors are unlikely to sell if they have invested so much in fees. A number of studies show that investors hold funds less than four years, on average. Bloomberg explains that these costs are equivalent to prepaying a nonrefundable rent for life when you move into a property and then moving after only three years.
An additional argument that planners use to sell these funds is that they are helping you obtain the best investments available and the price of admission is small relative to the potential rewards. Again we have a point that isn’t always consistent with the facts. Over the years, other studies have shown that mutual funds with up front sales charges underperform less expensive funds on average.
Financial planners often work as sales representatives for the investment products they sell, and they have no responsibility to find the best options for their clients. There is also no independent education that you are required to complete before you can use the planner’s services. The reverse mortgage industry takes the exact opposite approach.
The National Reverse Mortgage Lenders Association requires mortgage brokers who are members, like the team at Legacy Reverse Mortgage, to treat their clients fairly. The Code of Ethics says, “NRMLA Members shall describe to consumers the range of programs and products offered by the Member that may provide a bona-fide advantage to such consumers.”
The law requires that consumers receive independent counseling to explain the products to them. You can not obtain a reverse mortgage without being an educated consumer. In a perfect financial world, every major transaction would have these consumer safeguards.
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