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Author: Al Thomas Article source: http://investnewz.com/. Used with author's permission.
When purchasing mutual funds we are cautioned
to read the prospectus, look at past
performance, check out the fund manager's record
and see what their expense ratios have been.
We are also told that we should not buy funds
with expenses exceeding 1% to 1.5%. When you ask
the fund salesman (don't forget he's a salesman)
he will assure you that the fund expenses are
whatever is shown in the prospectus. He is
telling you the truth, but not the whole truth,
according the Securities and Exchange
regulations. In many cases he has left out a big
chuck of expenses.
The 1.5% expense means you are paying $150 each
year of every $10,000 you have invested with
that fund. The lower the expense is the more of
your money is at work. As a fund becomes larger
meaning they take in more money the expense
ratio should drop, but it rarely does.he fund
manager must make 1.5% to have your money stay
even.
If you can find your way around the Securities
and Exchange Commission internet web site you
will find that the definition of expense ratio
leaves out commission charges. Many funds will
turn over their portfolio by 100% in a year.
Obviously they are not going to buy and sell at
no charge. The floor broker must be paid a
commission for each share that is executed.
Sometimes brokerage fees are purposely inflated
and the broker kicks back favors(they don't call
it that) such as research information, free
computers and other favors. Been to the
Hampton's or Hawaii for that all-expense weekend
seminar? Course not.
The SEC does not require that this commission
cost be disclosed as an expense. Why? Their
answer is pure government hokum, "We exclude
brokerage costs because we have always excluded
brokerage costs". This is the SEC that is
supposed to be the watchdog for the investor.
Leaving out this important fact will hide
another .25 to .50 cents or more in some cases
in expenses that you are paying for. When you
call the fund to ask if their brokerage
commissions are included the person to whom you
are speaking probably won't understand and will
give you the standard answer that the number
shown in the Prospectus is correct. Getting a
true answer is like pulling an impacted wisdom
tooth. If you can get one.
Brokerage commissions are known to the penny
and could easily be included in the prospectus,
but these "soft dollars" as they are known are
not made public to the investors seem to
disappear.
Fund managers say these costs are insignificant
and that investors should look at the fund's
performance. If they did that and really
understood what they were looking at they
probably wouldn't buy 90% of the domestic stock
funds.
This is just another example of how the
investor has the wool pulled over his eyes and
another reason I find prospectuses worthless. Al Thomas' best selling book, "If It Doesn't
Go Up, Don't Buy It!" has helped thousands
of people make money and keep their profits with
his simple 2-step method. Read the first chapter
and receive his market letter for 3 months at
http://www.mutualfundmagic.com and discover why he's
the man that Wall Street does not want you to
know. Copyright 2005
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