3 Key (But Often Overlooked) Mutual Fund Return Statistics

Anyone who knows me knows that the minute I see a “Top” or “Best” list with regards to financial advisers or investments, I immediately want to do a detailed forensic analysis to substantiate or disprove such claims. As a plaintiff’s securities/ERISA, my attention is always drawn to the criteria that was used, or not used, in awarding such designations.

With financial advisers, the first question I always have is a simple one – did a financial adviser have to pay anything to be considered for the list. If so, that list has no value in my opinion due to the obvious conflict of interest issues with any “pay-to-play” requirement. No matter how much the creator of the list may claim such payment had no impact on the decision regarding inclusion on the list, such claims ring hollow, otherwise why have the payment requirement at all.

With financial advisers, a second often used, but questionable/debatable factor, is the amount of the adviser’s assets under management (AUM). The rationale often given for considering an adviser’s AUM is that it shows the return that an adviser has produced for his clients. Not quite. If AUM says anything, it demonstrates how effective an adviser is marketing their practice since AUM includes money brought in by new accounts. A new multi-million dollar account (or two) definitely impacts AUM, but proves nothing with regard to an investment adviser’s money management skills. Far too often I see investment advisers placing a client’s money in actively managed mutual funds with excessive fees and/or a history of consistent underperformance relative to a comparable, yet less expensive, index fund. This leads to our first often overlooked, yet key, mutual fund static.

Load-Adjusted Returns

With investments, the decision is often based on criteria such as annualized return. Nothing wrong with using annualized return as a criteria for evaluation as long as the proper annualized return numbers are being used. Far too often, “top/best” list creators, as well as investors, plan sponsors and other investment fiduciaries, are not using the proper annualized return numbers, and they up with invalid evaluations.

Index funds do not charge a fee just to invest in their funds. Actively managed mutual funds do charge investors such a fee, commonly referred to as front-end load, just to invest in their funds. Some actively managed mutual funds offer other types of potential fees, such as back-end loads, that may or may not apply depending on whether an investor withdraws all or part of their investment in the fund prior to a specified period of time.

Funds that charge a front-end load immediately reduce an investor’s investment in the fund as soon as they make their investment. Consequently, an investor in such as fund starts in a hole, as they will always earn less than in investor investing the same initial amount in an index fund earning the same annualized return over the life of the investment.

Most investors and investment fiduciaries are not aware of the potential impact of a front-end load on a fund’s performance. Mutual fund ads for actively managed funds typically reference annualized returns that have not been adjusted for the impact of the fund’s front-end load in order for their performance to appear to be competitive with comparable, less expensive, index funds. Actively managed mutual funds are required to disclose their load-adjusted returns annually in their fund’s prospectus and summary prospectus. But, how many investor’s actually read either of these documents or calculate the difference in monetary returns? Exactly.

I recently read a post on LinkedIn from the CEO of one of the largest mutual fund companies in America. His company’s funds are typically named as among the most popular funds, in both pension and non-pension accounts. In his post, he was naturally extolling the value of his fund and historical performance.

But his retail funds charge one of the highest fees charged in the industry. As a result, I have to wonder whether he was basing his remarks on the funds’ load-adjusted or non-adjusted annualized returns. For example, his most popular retail fund reported 5-year unadjusted and load adjusted returns of 15.03% and 13.68%, respectively, over the period 2012-2016. Based on an initial investment of $100,000, this would have resulted in an ending balance for the investor of $201,398 to 189,854, respectively, over that time period.

Over that same period, an investment in a comparable large cap growth no-load fund, the Vanguard Growth Index Investor fund, had a 5-year annualized return of 13.90%, for a ending balance of $191,698. Over that same period, an investment in the Vanguard S&P 500 Investor fund, would have resulted in a ending balance of $196,715.

Over 10-year period 2007-2016, that same fund reported unadjusted and load-adjusted annualized returns of 6.94% and 6.31%, respectively. Based on an initial investment of $100,000, this would have resulted in an ending balance over that period of $195,614 and  $184,391, respectively

Over that same 10-year period, an investment in a comparable large cap growth no-load fund, the Vanguard Growth Index Investor fund, had a 10-year annualized return of 7.99%, for an ending balance of $215,692. Over that same period, an investment in the Vanguard S&P 500 Investor fund, with an 10-year annualized return of 6.82%, would have resulted in a ending balance of $193,430.

I apologize for all the numbers, but I know some readers use them to verify my arguments and in their personal practices. At least that’s what I have been told.

So, the first key statistic that investors and investment fiduciaries should look for is an actively managed fund’s annualized load adjusted return. As I mentioned earlier, mutual funds that charge front-end sales charges are required to report the fund’s load-adjusted returns for both the most recent 5 and 10-year periods. Most mutual fund update their prospectus around the middle of the year. Load adjusted returns can also be found by searching under such terms as “VFINX (for Vanguard’s S&P 500 fund) 2016 5-year load adjusted returns.”


The second often over-looked key statistic for a mutual fund is the fund’s R-Squared number. R-squared has been defined as a “measurement of how closely a portfolio’s performance correlates with the performance of a benchmark index, such as the S&P 500, and thus a measurement of what portion of its performance can be explained by the performance of the overall market or index” instead of actively managed fund’s management team.

An actively managed fund’s R-squared number is often used to determine whether the fund qualifies as a “closet index,” fund, or an “index hugger.” A closet index fund is a fund that charges investor’s a relatively high annual expense fee, but essentially tracks the performance of a comparable, yet much less expensive, index fund. Actively managed funds started employing this strategy in order to avoid significant variances in performance which could result in their investors leaving for a comparable index fund.

While there is no universally accepted R-squared that denotes a closet index fund, most people use 90 or 95 as the line of demarcation, although others even use lower R-squared numbers. An R-squared number of 90, it can be argued, indicates that active management is only contributing to 10 percent of the fund’s performance, resulting in investors severely overpaying for the fund’s active management component.

A fund’s R-squared number is available at Morningstar’s web site (morningstar.com) on the fund’s page under the “Ratings and Risk” and “MPT Statistics” tabs.

The Active Expense Ratio

This over payment for an actively managed fund’s active contribution leads us to the third often overlooked key statistic for a mutual fund – the fund’s effective annual expense ratio, also known as the fund’s Active Expense Ratio (AER). The Active Expense Ratio metric was created by Professor Ross Miller as a means of measuring the extent to which investors are potentially overpaying for the limited contribution of an actively managed fund’s management team. Using an actively managed mutual fund’s R-Squared number and the incremental, or additional, cost of the actively managed fund’s expense ratio, Professor Miller found in many cases, actively managed funds are effectively charging their investors annual expense ratios significantly higher than the fund’s stated annual expense ratio, in most cases fees 3-4 times the fund’s stated rate, in some cases even higher.

The actively managed fund that I have using as an example has a stated annual expense ratio of 0.66 percent and a 5-year R-squared of 88.85. Once again, using the Vanguard Growth Index Investor fund as our benchmark, result in an AER of 1.91, approximately three times the fund’s stated annual expense ratio. Using the fund’s 10-year R-squared of 93.38 results in an AER of 2.57, approximately four times the fund’s stated annual expense ratio.

For more information about the Annual Expense Ratio and the calculation process, click here.


Costs obviously matter, as they reduce an investor’s end return. Each additional 1 percent in a fund’s fees and expenses reduces an investor’s end return. Over twenty years, each additional 1 percent in fees and expenses reduces an investor’s end return by approximately 17 percent. A fund’s R-squared number and its AER can provide valuable information to help investors and investment fiduciaries improve the performance of their portfolios by avoiding unnecessary expenses to create and maintain cost efficient investment portfolios.

An actively managed mutual fund’s load adjusted annualized return its R-squared and the three pieces of data required to calculate the fund’s Active Expense Ratio are all freely available online. Those willing to invest a little time in gathering such information and making the evaluations should be rewarded with greater financial security and the peace of mind that brings, as well as the ability to spot the bogus “top” and “best” investment lists.


Posted in Absolute Returns, Asset Protection, Closet Index Funds, Common Sense, Consumer Protection, ERISA, Fiduciary, Investment Advice, Investment Advisors, Investment Fraud, Investor Protection, IRA, pension plans, Portfolio Construction, portfolio planning, Portfolio Planning, Retirement, Retirement Plan Participants, Retirement Planning, Wealth Accumulation, Wealth Preservation | Tagged , , , , , , , , , , , , , , , , , , , , , , , ,

Investor Self-Protection Guide 2017

As a securities/ERISA attorney, Certified Financial Planner® professional and an Accredited Wealth Management Advisor®, I am interested in providing the public with quality financial advice and helping to address the ongoing problem of financial abuse and fraud. One of the reasons I created this blog was to help people be more informed about financial issues and allow them to be more proactive in protecting their financial security.

The public loses billion of dollars each year due to poor investment advice and financial fraud. Two of the primary groups targeted each year are the elderly and women. The exact figures for financial fraud on these two groups are hard to calculate due to the fact that it is estimated that as much as half of such cases are never reported due to fear of embarrassment and possible loss of independence and personal freedom.

When I speak with the public or potential clients, a frequent question is how to determine who to trust. My answer is to heed the advice of former President Ronald Reagan – “trust, but verify.”

Trying to understand all the investment products on the market is understandably challenging. I can tell you from experience that many of those peddling investment products do not truly understand the products. Many of these “financial advisors” try to impress the public and create a relationship of trust with clients and potential clients by referring to various titles and designations. However, a study by respected financial firm CEG Worldwide, concluded that only 93% of those holding themselves out to the public as “wealth managers” were simply salesmen trying to sell investment products. As the article warned, “[j] because your business card says ‘wealth manager’ on it, that doesn’t mean you’re a true wealth manager.”

Three Investments to Avoid

Three of the most questionable investment products currently on the market are variable annuities, fixed index annuities and actively managed mutual funds. My white paper on variable annuities, “Variable Annuities: Reading Between the Marketing Lines” is by far my most viewed post on this site. My feelings about the abusive practices connected with variable annuities are clearly set out in the Congressional Record – “the most overhyped, oversold and least understood investment product in America.”

Variable annuities are usually marketed with such claims as to financial security, such as “a never-ending stream of i come” and “income for your entire lifetime.” What is not mentioned is that in order to receive such lifetime income, the owner of the variable annuity has to give up possession of the money in the variable annuity. So eventually the money that a variable annuity worked a lifetime for and hoped to pass on to his/her family goes instead to the insurance company that sold the variable annuity.

As the white paper points out, even if an annuity owner does not activate the lifetime income option, the high fees associated with variable annuities can significantly reduce the end return a variable owner receives. Each additional 1% in investment fees and expenses reduces an investor’s end return by approximately 17% over a twenty year period. Since variable annuities charge minimum cumulative annual fees between 3-4%, a variable annuity owner can easily lose over 50% of their end return over 20 years.

Fixed indexed annuities are often marketed as a means to participate in the returns on the stock market without the risk of the market, to earn a higher return than the low-interest rates paid by traditional fixed annuities. The truth is that while fixed indexed annuities may pay a higher rate of interest than traditional fixed annuities, most fixed indexed annuities impose various restrictions and limitations on the actual interest that fixed indexed annuity owners can receive. Many fixed indexed annuity owners often end up receiving just a little more than the interest earned on a regular fixed annuity.

One marketing strategy fixed indexed annuities often use is to offer purchasers a “bonus” in the form of an additional cash investment in the annuity or a higher cap or participation rate. What investors need to remember is that there is no free lunch. The cost of such “bonuses” is usually a longer surrender period or a limited period for such higher cap or participation rates.

The evidence on actively managed mutual funds establishes that the overwhelming majority of actively managed mutual funds underperform their relative index. The most recent SPIVA report stated that over the five and ten-year period ending June 30, 2016, 94 and 87 of actively managed underperformed their relative indices.

Compounding their record of underperformance is that such funds are often cost inefficient, as the funds’ additional costs result in even lower end returns for investors. In order to prevent significant variances in returns from less expensive index funds, an increasing number of actively managed mutual funds are ensuring that they invest in such as way as to closely track their relative index. Such “closet index” or “index hugging” funds may achieve similar returns as comparable index funds, but the higher annual fees charged by such funds for such similar returns results in investors in such funds paying significantly higher effective fees, often 4-5, or higher, than a comparable index fund’s fees.

When I published an article disclosing how to calculate one of InvestSense’s proprietary metrics, the Active Management Value Ratio™ 2.0 (AMVR), many people asked my why I would do that, when I could charge hundreds of dollars to the public to prepare reports using the metric. However, by freely providing information and instructions on using the AMVR, the public does not have to ask who to trust and can privately use the “trust, but verify” strategy. Investors can then use the results of their AMVR analyses to either make changes in their portfolio or reject unsuitable investment advice. Investors can also use such analyses to consult with professional financial advisors such as a Certified Financial Planner® professional.


Investment fraud, including abusive marketing strategies, is a serious, and growing, problem. As our web site’s byline indicates, the best way for an investor to protect their financial security is to seek objective sources of information and to use such information in managing their financial affairs. Variable annuities, fixed indexed annuities and actively managed mutual funds reasons for customer complaints. Investors willing to take the time to research and analyze potential investment using tools such as the Active Management Value Ratio™ 2.0, can better protect themselves and avoid unnecessary financial losses.


Variable Anuities

9 Reasons You Need To Avoid Variable Annuities

5 Reasons Why You Should Never Buy a Variable Annuity

Fixed Indexed Annuities

Don’t Buy a Fixed Indexed Annuity Until You Read This

6 Questions to Ask Before Buying a Fixed Indexed Annuity

Actively Managed Mutual Funds

The Mutual Fund Industry Is a Huge Scam That Costs Investors Billions of Dollars a Year

Determining the True Cost of Actively Managed Mutual Funds

Investment Management Fees Are Much Higher Than You Think

© 2017 InvestSense, LLC.  All rights reserved.

This article is for informational purposes only, and is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances.  If legal, investment, or other professional assistance is needed, the services of an attorney or other professional advisor should be sought.

Posted in Asset Protection, Closet Index Funds, Common Sense, Consumer Protection, Investment Advice, Investment Advisors, Investment Fraud, Investment Portfolios, Investor Protection, IRA, Portfolio Construction, portfolio planning, Portfolio Planning, Variable Annuities, Variable Annuity Abuse, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , , , , , , ,

How Fees and Expenses Affect Your Investment Portfolio

Informative piece from the Securities and Exchange Commission discussing an issue I’ve discussed on other posts and white pages on this blog.




Posted in Common Sense, Consumer Protection, Investment Advice, Investment Portfolios, Portfolio Construction, portfolio planning, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , ,

The Evidence Based Investor

Two excellent posts for investors to consider from my British colleague, Robin Powell, of “The Evidence Based Investor” web site.

active-passive-overpaying-for-house fiduciary-rule-20-billion-for-investors

Posted in Investment Advice, Investment Advisors, Investment Portfolios, IRA, Portfolio Construction, portfolio planning, Portfolio Planning, Retirement, Retirement Plan Participants, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , , , ,

Promoting “Financial Wellness” and “Retirement Readiness”

Two of the hot buzzwords today in the financial media are “financial wellness” and “retirement readiness.” While many people consider financial and investing matters confusing and intimidating, the truth is that people can simplify most matters and still be successful.

The byline for this blog states our mission and belief – the power of the informed investor. The following information can provide a good foundation for establishing one’s financial wellness and retirement readiness.

1. Care – Far too many people just give up and do not even try to take steps to protect their financial security. Others just blindly accept what ever advice they read about or hear. Decide to care and take steps to become truly proactive in protecting your financial affairs by becoming better educated in basic, financial strategies and developing your personal “investsense,” which is defined as the art of combining sound, proven investment strategies with ordinary common sense.

2. Learn – Again, take the time to make use of some of the valuable resources available       online. Obviously, we recommend reading the various white papers and posts on this blog. Other valuable resources include the Vanguard, Kiplinger’s, Money, Forbes, MarketWatch, Morningstar and Yahoo!Finance sites.

3. Use – The last step is to actually apply one’s new-found knowledge into one’s financial affairs. With regard to investments, the adage “simplicity is the new sophistication” is truly applicable. Studies consistently show that the overwhelming majority of actively managed mutual funds fail to outperform their less expensive passively managed peers, more commonly known as index mutual funds. Studies have also shown that funds that are cost-efficient in terms of their annual expense ratio and their turnover ratio.trading costs perform better than less cost-efficient mutual funds.

Our free metric, the Actively Managed Value Ratio™ 2.0 (AMVR), allows an investor to quickly and easily assess the cost-efficiency of an actively managed mutual fund using only basic math skills. For more information about the AMVR, click here.

The importance of cost-efficiency is also shown by the long-term impact of investment         costs on an investor’s end return. Each additional 1 percent of investment fees and costs       reduces an investor’s end return by approximately 17 percent over a twenty year               period. This fact is why variable annuities, which typically charge annual cumulative fees of 2-3 percent, or more, are rarely a good investment choice since investors can  easily lose over 50 percent of their return due to the various fees charged by most variable annuities.

One final point on cost-efficiency has to do with avoiding so-called “closet index” funds. Closet index funds are generally defined as actively managed mutual funds that closely track the performance of stock market indices and index mutual funds, but charge significantly higher fees that a comparable index mutual fund.

A quick and simple way to determine whether an actively managed mutual fund is a closet index fund is to check the fund’s R-squared score on morningstar.com under the”Risks” tab.  While there is no universally accepted score for closet index fund status, InvestSense use a R-squared score of 90 or above as our guideline, indicating that 90 percent of a fund’s return can be properly attributed to the performance of an underlying market index rather than the fund’s management team. Unfortunately, most 401(k) and 403(b) plans primarily offer actively managed equity-based mutual funds that are cost-inefficient, as they have high R-squared scores and thus qualify as “return robbing” closet index funds.

4. Be Proactive and Defensive – Far too many investors lose money from trying to “chase returns.” As Charles Ellis points out in his seminal book, “Winning the Loser’s Game,” investing is properly a defensive process. By attempting to avoid significant losses, an investor can fully participate in market gains and reap the full benefits of compound returns. As I like to tell clients, “you’ll never get ahead if you have to spend all your time catching up.”

Many people like to promote a static approach to investing, often pointing out that “market timing” does not work. The key here is the definition of market timing. The classic definition of market timing is an all-or-nothing approach, moving one’s money so that it is either 100 percent in the stock market or 100 percent in cash. Such an approach is not recommended due to the potential costs of such an approach and the proven difficulty to perfectly predict the stock market.

A proactive approach to wealth management does not require, or recommend, such a radical approach. A sound proactive wealth management strategy would simply involve re-allocating a portion of one’s portfolio based on changes in the stock market or the overall economy in order to reduce the risk of large losses, using an investor’s financial goals and needs as guidelines for such re-allocations.

Posted in Absolute Returns, Asset Protection, Integrated Estate Planning, Investment Advice, Investment Portfolios, Investor Protection, Portfolio Construction, portfolio planning, Portfolio Planning, Retirement, Retirement Plan Participants, Retirement Planning, Variable Annuities, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , , ,

Special Report: Empowering Teachers for Retirement Readiness

Let’s get straight to the point – teachers at all levels have gotten, and continue to get, inequitable treatment when it comes to options to allow them to become “retirement ready.” My sister-in-law was an assistant principal in a local education system. First thing I told her – NO VARIABLE ANNUITIES! Variable annuities are one of the leading reasons  for customer complaints to regulators every year, and for good reason. They are one of the most oversold, least understood and most abused investment products sold to the public. The high costs and generally poor investment options forced on variable annuity owners are one of the main reasons for a popular saying among investment professionals – annuities are sold, not purchased.

Investment fees and other costs matter. Each additional 1 percent in fees and other costs reduce an investor’s end-return by approximately 17 percent over a twenty year period. Given the fact that variable annuities often charge annual cumulative fees of between 2-3 percent, a variable annuity could reduce a variable annuity owner’s end return by 33-51 percent. And guess who gets that money? Right the variable annuity company that sold you the horrible investment in the first place. For a more comprehensive analysis of the issues involved with variable annuities, click here.

But it’s not just variable annuities that have been unfairly forced on teachers. The retirement business in connection with educators has essentially been controlled by a small group of investment companies, TIAA-CREF, Valic and Fidelity investments. TIAA-CREF has been the proverbial 600-lb gorilla in the college/university sector, with Valic being the dominant entity at the elementary/high school level.

The main product that both companies have traditionally tried to peddle has been variable annuities. Why? They pay some of highest commissions of any investment product, sometimes as much as 7 percent compared to the 4-5 percent paid by many actively managed mutual funds.

TIAA-CREF, Valic and Fidelity also offer teachers a variety of mutual funds. However, overall, the funds offered by these companies fail to pass a simple prudence analysis due to the combination of poor performance and high fees and costs.

Studies have shown  that the proper way to analyze actively managed mutual funds, the most common type of funds offered by teachers’ retirement plans, is to compare the incremental, or additional, costs they charge to the incremental, or additional return they provide compared to less expensive, passively managed, or index funds. Other studies have shown that the two best predictors of a mutual fund’s performance is a mutual fund’s annual  expense ratio and trading costs, as both directly impact a fund’s bottom line and an investor’s end-return.

Based on those two facts, I created a simple cost/benefit metric, the Active Management Value Ratio™ 2.0 (AMVR), that incorporates those elements to determine the cost efficiency of an actively managed mutual fund. In short, approximately 80-85 percent of actively managed mutual funds are not cost efficient when compared to comparable passively managed mutual funds. In some cases the actively managed funds are significantly cost inefficient, with costs 1-2 percent higher, in some cases even higher. Again, 1-2 percent in additional investment costs translates to a 17-34 percent reduction in end-return. For more information about the AMVR, click here.

The last issue about teachers’ retirement abuse has to do with the management of one’s retirement account. Some “financial advisors” will advise teachers to establish an investment portfolio and never make any changes in the portfolio except perhaps to periodically re-balance the investments in the portfolio to restore the portfolio’s original allocation percentages.

Those same “financial advisers” will often attempt to justify such advice with statements such as “market timing does not work. What they often fail to disclose is that they often receive an annual payment from a fund company, generally referred to as 12b-1 fee, for each year you continue to own one of the fund company’s funds. So much for being a “trusted adviser.”
History has shown that true market timing does not work due to the difficulty in successfully predicting the stock market and the costs with making investment trades. However, the key is determining exactly what constitutes “market timing.” Classical “market timing” involves trying to predict the stock market and employing ans “all in” approach to investing, positioning one’s investments 100 percent in the stock market or 100 percent in cash, with no other options.

Such an approach is clearly imprudent from both a cost and risk standpoint. However, the “re-balance only,” also known as the “buy, forget and regret” approach is also imprudent and ignores the fact that history clearly shows that the stock market is cyclical. Given that fact, one should heed the wise words of the Chines philosopher Lao Tzu, who said that “the best way to manage anything is by making use of its nature.”

Since the market has proven to be cyclical, Lao Tzu would suggest that the best approach to managing one’s investment portfolio is to adopt a more proactive, yet prudent, approach to managing one’s retirement accounts. Noted investment icon, Charles D. Ellis would concur with this approach to investment management, as he has warned investors that investing “is, and always should be, a defensive process” and “the secret to successful investing is to avoid significant investment losses.”

This defensive approach makes even more sense for managing investment accounts. Advocates of the “buy-and-hold” approach often try to justify their position to pointing to the trading costs and potential tax problems that can result from making changes in an investment portfolio. However, retirement accounts are tax-deferred accounts, so changes can be made in a retirement account without any tax consequences.

The buy-and-hold” advocates second argument is also without merit. The goal in adopting a proactive, defensive approach is not to perfectly time the stock market and does not need to be in order to provide an investor with significant benefits. When an investor suffers an investment loss, that constitutes an opportunity cost for an investor, who must then use the eventual market to simply restore their retirement account to its original value. As I people. “you will never get ahead if you have to spend all your time catching up>

Many investors underestimate the opportunity cost created by significant investment losses. When I speak to groups I often ask them this simple question – If I suffer a 50 percent loss in my portfolio in year 1, then earn a 50 percent gain in year 2, what is the value of my portfolio?

Most people say that my portfolio is back to its original value. But the correct answer is that my portfolio is still 25 lower than it original value since the 50 percent return in year 2 was on the reduced value of my portfolio as a result of loss in year 1. To fully recover from the year 1 loss, my portfolio has to eventually earn a 100 percent return on the value of  my portfolio after the year 1 loss.

During the bear market of 2008, many investors suffered losses of 40 percent or more. An investor would have to earn a return of 67 percent just to recover from the original 40 percent loss. The investor also suffers an opportunity cost, as the return required for recovery does not go to growing his account even larger than its original value.

In suggesting that teachers and other investors adopt a proactive, yet defensive and prudent approach to managing their retirement accounts, I am not suggesting the use of some complicated mathematical formula. For instance, prior to the 2008 bear market, the market’s price/earnings ratio was at historical levels, suggesting that the level was unsustainable and ripe for a market correction or worse. By taking a profit and re-allocating the assets in their retirement account to whatever level they felt comfortable with, teachers and other investors could have minimized their exposure to the significant loss that was to follow, again with no additional tax and probably minimal, if any, trade costs, as many fund companies allow retirement account owners to make a certain number of free trades annually.

Teachers provide a valuable service to society. Yet their pay rarely reflects the value of their contributions. Even worse, they have been saddled for years with an inequitable retirement system that primarily serves the companies that peddle their inferior investment products rather than the teachers and other plan participants. This point can be easily proven by using the Morningstar web site (morningstar.com) and the Active Management Value Ratio™ 2.0 to analyze the mutual funds offered within their 403(b) or other retirement plan.

Don’t even take the time to evaluate the variable annuities these companies peddle, as their high fees disqualify the overwhelming majority from any serious consideration. The various investment subaccounts, or mini-mutual funds, that a variable annuity owner is given to choose from generally suffer from similar high fees and a history of under-performance relative to less expensive passively managed, or index, funds.

403(b) and 457(b) plans at private collages and universities have recently become the target of litigation, as they are subject to the strong fiduciary requirements of ERISA. Unfortunately, state-run schools are not subject to ERISA, so there has not been similar litigation against such schools, despite the obvious inequities in the current system used by such schools. However, teachers in state-run schools may soon get the much-needed relief they deserve, as state-run schools may soon face the same litigation private schools are now facing using state laws and regulations to provide teachers with the relief that they desperately need and deserve.

© Copyright 2016 InvestSense, LLC. All rights reserved.

This article is for informational purposes only, and is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances.  If legal, investment, or other professional assistance is needed, the services of an attorney or other professional adviser should be sought


Posted in Asset Protection, ERISA, Fiduciary, Investment Advice, Investment Advisors, Investment Fraud, Investment Portfolios, Investor Protection, pension plans, Portfolio Construction, portfolio planning, Retirement, Retirement Plan Participants, Retirement Planning, Variable Annuities, Variable Annuity Abuse, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , , , , , , , , , , , ,

Wells Fargo, Bank Cross-Selling and Your Right to Privacy

By now, most people are familiar with Wells Fargo and the illegal activities they engaged in by creating fictitious accounts to misrepresent their financial operations. What Wells Fargo did is wrong for a number of reasons, including inflating the price of the stock on the basis of the false representations and improperly using the personal information of the customers that they used in creating the fictitious accounts, which constitutes a blatant violation of those customers’ right to privacy.

Now word comes out that federal and state regulators, including law enforcement agencies, are going to launch a wide-spread investigation of banks and other financial institutions to determine if such entities engaged in similar copycat illegal activity. Given the wide-spread use of cross selling by financial institutions, it would not be surprising to find such copycat illegal activity, albeit not to Wells Fargo’s extent.

Legally, the law allows banks and similar financial institutions to engage in internal cross-selling between the various divisions within their company. For instance, my personal bank would routinely send me solicitations for insurance that they sold. Despite repeated requests from me to stop such activity, the bank only stopped when I threatened legal action based on the fact that I had exercised my right to “opt out” of such activity.

While the law allows banks and similar financial institutions to cross-sell to its customers, the law does not allow them to share their customers’ personal information with non-related third parties. More importantly, banks and financial institutions that do engage in internal cross-selling are required to notify their customers of their right to opt out of such cross-selling altogether and provide a simple means for customers to do so. In most cases, the banks and financial institutions provide a means of opting out of cross-selling on their website, usually clicking a link on the web site.

Consumers should opt out of such cross-selling programs to protect their right to privacy. Banks and other financial institutions are already making money on your accounts, so there is no reason to allow them to use your personal information for further gain. Opting out of such cross-selling activity also ensures that a customer can legally enforce their right to privacy when it is discovered that their bank has engaged in Well Fargo like illegal activity.

Customers who do opt out of cross-selling should be sure to document the fact that they exercised their right to opt out of such activity. In cases where the right to opt out is provided online, usually at the bank’s web site, the site will immediately acknowledge that the customer has exercised their right to opt out. If the customer’s act of opting out is not acknowledged at the time the right is exercised, the customer should follow-up with a certified letter to the bank or other financial institution notifying them of the customer’s exercise of their opt out rights and asking the bank to acknowledge receipt of such opt out exercise.

Identity theft is one of the largest illegal activities in the U.S. Having been a victim of identity theft twice, I can personally attest to the inconvenience and problems created by identity theft. I have never engaged in financial transaction online, yet have still been victimized. Law enforcement officials have explained to me that there are various computer programs that can run random and unlimited “Monte Carlo” type searches while the identity theft perpetrator sleeps and document when a “hit,” or bank account information has been obtained.

Hopefully, one of the results of Well Fargo crime will be new rules and regulations restricting or prohibiting cross-selling programs by banks and other financial institutions or ,at a minimum, requiring such entities to actually obtain permission from a customer to involve them in such activity, rather than the “negative consent” approach currently approved which requires a customer to be aware of such activity and understand how to protect their privacy via their right to opt out of such cross-selling programs.

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