What is the role of individual financial advisors in selection of mutual funds?


    When an investor buys a mutual fund typically the fund is dedicated to investing in one particular asset class or strategy. Rarely does a fund manager say “even though my fund is the best in asset class “X”, I think the asset class is bad, so please sell your shares in my mutual fund.”

    Investors need an independent financial advisor who can recommend types of asset classes to invest in and then drill down and recommend a particular mutual fund that is a good match for the client’s risk tolerance ability and goals. It is not enough to simply pick a good mutual fund; instead an investor needs to be aware of what asset classes are best to invest in and what should be avoided.

   Asking the mutual for advice about asset classes is not a good idea because they are not objective. Their goal is to sell you on the idea of using one of their family of mutual funds. The problem is that some mutual fund families lack expertise in certain investment segments. For example many fund families lack a suitable foreign currency denominated bond fund. So if you asked some of the largest fund families about this asset class they would either have to mislead you into accepting a water-down poor quality in-house fund or they could try to sell you on the idea that you should avoid that asset class.

   The most important thing in investing to pick the correct asset class. This is hard because the one that is now going up may have reached its top and will reverse course, so often one must be a contrarian and pick an unloved and undiscovered underperforming asset class.

  The 2nd most important thing in investing is to avoid excessive risk. Strategies to do this could be to choose funds with lower than average risk characteristics rather than ones with the highest rate of return

 investment secrets

Unlock investment secrets


How can an independent financial advisor save investment costs?



    Of course a mutual fund family may also try to sell you a fund that is expensive when a less expensive one can be found at a competitor. For example many mutual funds have different share classes such as “A” shares and “I” (institutional class) shares. The A shares often have a load fee of 5% which is a one-time upfront charge and an annual management fee of 1%. But investors can get the fund in “I” class shares with no load and with a management of only about half charged by “A” shares. The way to find out about that is to slowly and carefully read every word in the world’s driest document, the mutual fund prospects where it is a fully disclosed. If you ask the fund company over the phone they will say you need $5,000,000 per each mutual fund to buy “I” class shares.

    However, a loophole exists that allow the purchase of “I” class shares in reasonable amounts. Find a Broker who will aggregate their clients holdings and then they may let you buy “I” class shares with $100,000 per mutual fund. So a $700,000 portfolio could be invested in seven different funds with “I” class shares, thus avoiding expensive fees. This is something they won’t tell you when you contact a mutual fund, or if they do write about it in the prospectus it is written in such an artful “hide-in-plain-sight” way that an investor would not know that he could have bought “I” class shares in reasonable increments.

   A registered investment advisor (my company is one) can assist you in finding which “I” class mutual fund shares can be bought through retail Brokers and without requiring you to place your assets under management with the advisor.

     I have written “Do you need an advisor in a bear market?”

      Investors should seek independent financial advice.