Mercy! Mercy! That Dang Nabed PERCY!

Be Wary

Be Wary of Mutual Funds

For years it has been the conventional wisdom that little guys need to protect their nest eggs by investing in mutual funds. “Let the experts manage your money,” the spiel goes, “and then just let it sit there.” Ever heard of the “Rule of Seven”? That rule claims that these fund managers will double your money in seven years. Now I don’t doubt that there are honest reputable well managed funds out there that maintain a commitment to traditional fiduciary values. However the business is littered with the likes of Madoff, Corzine and a host of other bankers and financiers of questionable repute, waiting to rip the small investor off.

Bankers, financial managers, and brokerage firms have been tainted by the excesses of the unscrupulous and even the honest ones push the margin to the absolute limits of good judgment. If you are a small investor there are not many alternatives and if you get a good fund management team working for you it is more the result of good fortune than any prudence or sagacity on your part. If the experts can get “Blindsided” what chance does the little guy have? Here are some of the problems.

Big Investors and Little investors.

There are “Preferred” investors and “What the hell, we’ll take your money” pip-squeak investors. In the Summary Prospectus of my fund they are referred to as Class Y and Class I. A class Y investor must open an account with $2 million dollars while a class I investor can do the same with only $1 Thousand dollars. An ambiguous example is provided that fails to tell the investor how the distribution of yields will be split between the two groups. However, it is reasonable to assume that the large investor will get a better percentage.

Fees:

There are sales charges, redemption fees, management fees, distribution fees, operating expenses, and other expenses. Regardless of how poorly or well the fund does the investor pays these fees.

Risks:

The investor takes on the burden of Credit Risks, Foreign Securities Risks, High Yield Securities Risks, Income Risks, Interest Rate risks, Liquidity Risks and Management Risks. You pay for their failure! What is business as usual for them is money out of your pocket. This means that any profits the fund makes can be adjusted by these risk factors to take earnings from the investor and retain them in the fund. Thus any setback or adversity the fund faces can be compensated for by raking the shortfall off the top of the profits. The Fund has the best of both worlds. They get a percentage of the take and the fees and losses are born by the investors. If managers want to squeeze more profit, they simply tweak the risk factors. In good economic times this is easier to swallow than in bad times. The small investor is expected to accept this fund skimming of profits as a matter of course.... business as usual.

Under the Mushroom

Mutual Fund Investors are not kept well appraised of how the instruments are doing. The Prospectuses are next to worthless. Sure, buried somewhere in the reams of CPA statistics is probably the management information a small investor needs to make an assessment of how the fund is doing. There might be an occasional report or statement that shows the funds starting and end period value. However, nowhere will it show what the total profits were and how much was deducted for fees, commissions, services and losses. What ever happened to the profit and loss format? The fund managers seem to think Hey! You made 6%.... shut the heck up and quit complaining!

Buying a Fund through a Bank

Never do this! A bank is at best getting a preferred rate and at worst a kickback when they refer a customer. (Remember Y and I customers) Their fund advisors face pressure to sell the company product even though it might not be in the customer’s best interest. (A poor performing fund) It is called conflict of interest and permitted in the trade.