Finance For Educators — “And the truth will set you free” (and dramatically reduce the rate!)

“Joe the plumber” – no kidding his real name – recently took a break from completing some work in my house and asked, “What are you writing about?” “Finance and Fees,” I answered thinking that would put a quick damper on his questioning. Much to my surprise, Joe immediately asked “What fees?” and went on to describe his wife’s portfolio and express his frustration with her investments that “only seemed to go down.”

Since I had already had the Morningstar website open – an independent financial group that provides information on mutual funds and stocks including performance and fees – I provided him with some quick feedback on his wife’s portfolio.  The first name from her list of mutual fund investments was MFS Equity Income A, “a name” both meaningful and ominous.

To begin with, once I heard the first three letters “MFS,” I knew it was a “load fund,” a fund that stealthily piggybacks an additional payment on top of the standard management fee. In the case of, MFS Equity Income A (EQUNAX), it imposes a “front load” or charge of 5.75% that is subtracted from the original investment. For example, if you invest $10,000 in this fund, the fund company charges you $575 at the time of purchase, leaving you with a sum of $9,425 in your account. To rub more salt into the wound, that same fund charges an additional management fee of 1.08% or another $102.00 a year.

          This maddening story of an advisor not providing complete transparency and full disclosure to the likes of Joe and his wife proves not that uncommon. Under the status quo in the financial industry, advisors must only provide “suitable” investments, which is so vague that it opens up a loophole large enough to fly a fully loaded 747 through it. Unfortunately, advisors still need not act as a “fiduciary” where they are both legally and ethically bound to place their client’s best interests ahead of all other factors.  Like Joe, many investors are victimized by advisors who benefit from “soft dollars” where they receive undisclosed fees from selling overpriced investments with hidden fees.

What should the individual investor do to protect their investments? First, perform a little “due diligence” with your own mutual funds and identify what you’re paying for each investment. Here’s a trial run using MFS Equity A, ticker symbol EQNAX.

• Go to Morningstar.com

• Type the ticker symbol, EQNAX, for MFS Equity A in the in the quote box

• This page provides information on the Yield, Load, Assets and Expenses

• In the case of MFS, the load of 5.75% is provided in column #2 under Load and the yearly management fee of 1.08% is under column #3 under Expenses.

       Finally, if you own a load fund based on the advice of a financial advisor, you should ask WHY and consider “unloading” your advisor. Then you should seriously consider replacing your mutual funds with high management fees with low cost index funds.

       The solution for Joe and as well as the vast majority of investors can best be framed by Churchill’s quote about the truth. “The truth is incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is.” The simple and incontestable truth about investing endures: actively managed dollars with high fees, like Joe’s mutual fund, consistently underperform passively managed dollars (index funds) with low fees.

— Robert Miller (retired)