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dpfromrockhillsc

Switched From Valic To Edward Jones

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Guest TR1982

You saintly ones make it sound so simple. Where were you in 1975? Where were all your wonderful low cost index funds in 1975? The Vanguard Index 500 fund wasn't even started until 1976. The average mutual fund in 1975 probably had a fund minimum of $5000 and and an average expense ratio of 2-3%. (Not to mention the fact that there probably only 500 funds then) I guess that was a ripoff then as well. The 403b market in 1975 probably comprised a few hundred million dollars. In fact, the 403b market realy didn't start growing until after the tax reform act of 1986. You all make it sound like this was some long term conspiracy. The reality is that probably less than 1% of all teachers in 1975 even had a 403b account. Period. I would suggest you guys stop hanging out with Oliver Stone.

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In his book "The four pillars of investing", William Berstein states,

 

"The dominance of the investment market by mutual funds is a relatively recent phenomenon. Before 1960, mutual funds werel largely ignored by the investing public because of the high sales fees, usually 8.5 % and uninspiring performance."

 

At that time mutal fund fees were known by the investing public, and people either bought stocks directly, or did not buy.

 

Currently the full cost of mutual funds sold by the 403b insurance industry are not disclosed to the purchaser, so he buy unknowingly. At this same time there are numerous active and passive funds sold by the non insurance mutual fund industry without loads and at a relatively resonable price accounting for the industry's recent growth.

 

Ira

 

 

 

 

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Currently the full cost of mutual funds sold by the 403b insurance industry are not disclosed to the purchaser, so he buys unknowingly.

 

This is a half-truth, at best. I believe that certain advisors do not go out of their way to fully disclose costs, so you have a point. By the same token, all such funds are sold by prospectus only, and the prospectus discloses ALL costs. So the consumer bears some burden for his/her ignorance, as well.

 

To me, that is the TRUE value of a site like this one: it might bring enlightenment to investors who are otherwise unaware of such costs, even though they should be. In a perfect world, ALL advisors would do their proper footwork and educate their clients accordingly. I'm not sure what percentage do so, but I do know the number falls short of 100%.

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Guest TR1982

How long is a recent phenomenon? 1960 was 45 years ago! In 1960 I bet less than 5% of American households owned any kind of equity in a public company. Today that number is close to 40-50%. Guess what? It's due to the growth in mutual funds!!!!!! Mutual funds allowed small investors to get into the equity market without having to take huge risks and at a low cost.

 

BTW, in 1960 it probably cost 3-5 times more to build a portfolio of individual stocks than to invest in a mutual fund. A lot of folks here seem to think you could trade a stock in 1960 for $9.95. Nope. It was probably more like $100-$150 a trade. That's why the equity markets were the domain of the wealthy investor until, you guessed it, mutual funds started being sold by more firms.

 

The simple truth here is this: probably no one on this board would own any kind of equity today if it were not for the rise of the mutual fund industry. I would wager a guess that your friend Dr. Bernstein didn't own any stocks in 1960 either. He was probably not old enough or in medical school at the time.

 

"Currently the full cost of mutual funds sold by the 403b insurance industry are not disclosed to the purchaser, so he buy unknowingly. At this same time there are numerous active and passive funds sold by the non insurance mutual fund industry without loads and at a relatively resonable price accounting for the industry's recent growth."

 

I don't understand how you can say this. Clearly, YOU know what the costs are, so somebody does. Also, how can you so brazenly speak for every purchaser of a 403b? Are you stating that every person who ever bought a 403b never knew what they were paying? This is the kind of comment that is based in no fact and can't ever be substantiated. This is why I told Texasfans to not believe everything he "reads in the newspaper". If you are gonig to make an assertion like this, please give us the facts.

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I'd just like add in here that in my experience with the insurance industry and retirement plans - particularly 403b plans, it is most often the case that plans served by insurance carriers and sold by insurance intermediaries are funded with annuity contracts. Once in a while, the carrier will offer a custodial (trust funded) plan and a menu of (directly) mutual funds, but not often.

 

The annuity contract offered for sale by an insurance carrier must be registered with and approved by each state's insurance regulatory body. To my knowledge (and anyone - please enlighten me if I am unaware) there is no federal regulatory oversight of the insurance industry. Mutual funds are frequently offered (purchased by the insurance company) to serve as a variable Separate Account investment instrument within the annuity contract.

 

Technically, then, the mutual fund shares are owned by the insurance company. The contract-holder owns shares of an Insurance Company separate account within their annuity contract.

 

French Teacher may be technically accurate that "all such funds are sold by prospectus only, and the prospectus discloses ALL costs" but the practical matter is that many variable annuity (VA) contractholders own separate accounts. Contract charges, administration fees, deposit fees, investment fees, surrender fees, agents commissions, etc., there is alot there to wade through.

 

Can the investor uncover all of the layers of fees and expenses? Yes-sure. But that is a tremendous amount of work (even for professionals) and the trouble for the public is that they do not know what they do not know. Most important, there is likely to be no-one around to guide them when the application is presented. That "Free-look period", is a very small window. At signing (application time), its the investor, the rep/agent, and maybe the carrier. The contract comes in the mail, is put on the shelf, and terms are not carefully examined.

 

My, what a contrast to how one invests direcly, using no-load mutual funds!

 

Cheers!

 

Danc

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Guest TR1982

danc,

You make it sound like it is significantly different. It is not. I have been in the securities industry for 18 years and there are many, many products out there that are far more exotic, have far more risk, have far higher price tags and are sold to teachers everyday.

 

VA's are registered in every state they are sold and are registered with the SEC since they are a security. Not only do advisors have to be licensed in the state they live in, but they must also posess the appropriate securities license as well. In other words, there is greater regulatory oversight, not less.

 

A VA must have a prospectus since it is a security. A mutual fund must have a prospectus since it is a security. Each prospectus must adhere to the standards and guidelines mandated by the SEC for disclosure and fees. In each prospectus there is a table that clearly explains the type and amount of fees and expenses. If you don't believe me, go look, you might be surprised at how obvious it is.

 

When you buy a no load fund directly from a no load fund company it is assumed by the fund company that you have read and understand the prospectus. If you chose not to read the prospectus, they will still cash your check and invest your money.

 

If an advisor sells a fund or VA they are required to deliver a prospectus to the customer before or at the time of sale. They are required to disclose to the customer in writing or orally, the fees and expenses in the investment product. In addition, they are required to document that this is a suitable investment for the customer.

 

The prospectus is the only legal document that a customer can and should refer to in order to understand the fees and expenses in the investment. This is true for no load funds and load funds as well as VA contracts. In other words, buying no load funds is no different than buying any other security.

 

I believe the issue that many here don't like is the fact that they might have to deal with an advisor or salesman. For some people that's fine. But many people want help and many people should get help because they need it.

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TR......I don't understand the logic of this, "BTW( I don't know what BTW stands for?), in 1960 it probably cost 3-5 times more to build a portfolio of individual stocks than to invest in a mutual fund" Are you saying that it costs 3 to5 times as much as the 8.5 load that was used at that time, so that that the cost to set a a portfolio wiuld be between 25 and 42 percent?

 

I had invested in the late 60 ies in individual stocks and I do not remember paying that amount. (Of course, I don't remember much about the 60ies).

 

With reference to the below conversation that you posted. Since you have been in business selling 403b insurance funds for the last 18 years, I wonder if you could estimate the percent of clients who you think fully knew about the exhorbitant fee associated with the insurance products , and also were aware of alternative investments costs, such as no load funds, and still bought the loaded insurance product. I bet the answer of this is closer to 0 than to 100 percent.

 

"Currently the full cost of mutual funds sold by the 403b insurance industry are not disclosed to the purchaser, so he buy unknowingly. At this same time there are numerous active and passive funds sold by the non insurance mutual fund industry without loads and at a relatively resonable price accounting for the industry's recent growth."

 

I don't understand how you can say this. Clearly, YOU know what the costs are, so somebody does. Also, how can you so brazenly speak for every purchaser of a 403b? Are you stating that every person who ever bought a 403b never knew what they were paying? This is the kind of comment that is based in no fact and can't ever be substantiated. This is why I told Texasfans to not believe everything he "reads in the newspaper". If you are gonig to make an assertion like this, please give us the facts

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Guest TR1982

Ira,

 

BTW (by the way)

 

The cost of buying and selling individual stocks in the 1960s was easily 3-5 times the 8.5% load people paid on mutual funds. For example, you could have invested $2500 in the Putnam Fund and paid an 8.5% front load. That would have been $212.50. You could have then invested another $100 per month at 8.5% which would have been $8.5 each month or $102 annually. Do you honestly think that any brokerage firm in 1965 could have sold you 10 different stocks worth a total of $3700 for a commission of $314.50? I doubt if they could have sold you one stock for that trading cost. There are firms that might charge you that today.

 

Personally, I don't think all the fees in insurance products are exorbitantly high. Some are. The firm I work for has a line up of funds where the average of M&E and fund expense is about 1.75% That's only slightly higher than the average for fund expenses in the mutual fund industry (1.60%) When you consider that someone could have access to 60 funds including a fixed interest option with the ability to diversfy among those options, I think thats' not a bad deal. They certainly could not do that with a no load complex. They would have to meet fund minimums for each fund and couldn't dollar cost average into different funds unless they contributed a significant amount each month.

 

"I wonder if you could estimate the percent of clients who you think fully knew about the exhorbitant fee associated with the insurance products , and also were aware of alternative investments costs, such as no load funds, and still bought the loaded insurance product. I bet the answer of this is closer to 0 than to 100 percent."

 

I bet the answer is is about 80-85% who would buy what I offered. Ira, there have been numerous studies regarding employee participation in retirement plans and the reviews consistently come out like this:

 

About 10-20% of the employee population wants self service options (no load funds)

80-90% want advice and direction along with fund options.

Now I know nobody here believes this, but it's true. That's why there isn't some incredible groundswell to put Vanguard into every public school system in America.

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TR, On a personal level, I wish you continued success in selling the products that you represent for your company and in your career. You are upfront and dedicated to your products. You are working in a profession that is legal. However, as you know we have fundamental difference in our viewpoints about the industry and products, probably, I guess because we see this from different viewpoints. We also I'm sure can agree on some aspects.

 

All that I am able to remember about the cost structure to buy stocks in the 60ies were that the larger stocks(dow jones types) were sold by blocks of 100 at a lesser price than stocks that were sold in odd lots of less than 100. Different smaller priced stocks(maybe NASDEX) were sold based on a bid/asked price spread. I do not remember anybody I knew who bought mutual funds, however there were several who bought stocks directly.

 

The example that you gave talks about dollar cost averaging small amounts of stock over time with a high load, and probably high fund expenses as well. I think that I remember hearing about mutual funds at the time, and back then I thought that it would be better to buy stocks issues one at a time, to save cost. (Even then I was aware of cost). At the time, I did not have the knowledge that I have now, and favored stocks over mutual funds(because buying one issue at a time to keep long term was a better deal).

 

I believe that I read somewhere(but not sure) that about 80 percent of people have bought mutual funds via an agent instead of direct no load, so Iwould guess that ther are lots of people who would rather have someone service them(perhaps because they might be intimidated by the process of selecting funds), however many have bought because they do not know about no load funds, and that they could develop their own asset allocation. The proportion of people who would rather have more service or less is somewhat unclear to me.

 

Ira

 

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I believe that I read somewhere(but not sure) that about 80 percent of people have bought mutual funds via an agent instead of direct no load, so Iwould guess that ther are lots of people who would rather have someone service them(perhaps because they might be intimidated by the process of selecting funds), however many have bought because they do not know about no load funds, and that they could develop their own asset allocation. The proportion of people who would rather have more service or less is somewhat unclear to me.

There's probably no good way to measure this metric (how many people want service vs. how many people don't). I think a lot of the people who are buying from agents wouldn't necessarily list "great service" as the reason they're doing so, but I'm just guessing.

 

By the same token, I have a really hard time believing that people "don't know about no load funds." In my district, there are three no-load carriers offered, and while they don't dominate the market in my local, everyone is well aware of them. On a larger scale, it's even harder to imagine that people are unaware of no-loads: Fidelity, TIAA-CREF, et al sure seem to spend a decent amount of advertising dollars.

 

What I CAN imagine, though, is that an awful lot of people aren't really aware of how 1% less per year on their returns will impact their savings in the long run.

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Hi DP,

At this point you need to start educating yourself about investing. Even if you decide you want professional advice from a fee only financial planner, you need to understand the basics so you can determine if the advice makes sense to you.

 

First, you might start by reading Dan's book, "Teach and Retire Rich." Also go to Morningstar.com, read and ask questions on the Vanguard Diehard Forum. It is one of the better discussion forums.

 

Here are some quick tips: an asset allocation plan is important, fees are important-use no load mutual funds-Vanguard is one of the best for low fees, and don't be seduced into thinking there is some magic bullet to getting rich. You create wealth over time with savings and a good asset allocation that meets your own unique needs.

 

Keep asking questions. It is your money. Best Wishes.

 

Joe

 

 

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Guest Sierra

FT says: "What I CAN imagine, though, is that an awful lot of people aren't really aware of how 1% less per year on their returns will impact their savings in the long run".

 

FT: In light of recognizing this important fact why do you continue to be a policyholder of a 200 basis points variable annuity?

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FT says: "What I CAN imagine, though, is that an awful lot of people aren't really aware of how 1% less per year on their returns will impact their savings in the long run".

 

FT: In light of recognizing this important fact why do you continue to be a policyholder of a 200 basis points variable annuity?

 

I think I said 1%, not 2%. At any rate, that 1% is costly, but improper asset allocation and/or a complete lack of participation at all is even more costly. Given that, the expense ratios that I pay in my VA are more than reasonable, I find.

 

The people that I was referring to in my comment are those that are paying 1%, realizing little or nothing in exchange for that 1%, and proceeding under the wrong assumption that 1% annually is an insignificant amount of money. It certainly IS a significant amount of money, and anyone paying it better be getting something valuable in return for that money.

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Joel,

 

FT said 1% less in annual RETURN will negatively affect the final amount of retirement funds (which is true). I think you are interpreting that to mean 1% in higher FEES will dictate 1% lower returns than a lower cost 403b plan (which is sometimes true and sometimes not).

 

For example, using the Oppenheimer 403b plan (C shares- almost 200 basis points) compared to a very similar (risk, % stocks, etc.) TIAA 403b portfolio. The Oppenheimer portfolio outperformed TIAA's by 4% over the last 5 yrs. annualized and by nearly 2% over the last 10 years annualized. Someone in my family has this same Oppenheimer portfolio, so this is a real situation. The rep. who sold this product also has provided pretty good service/financial advice. By using a similar American Funds 403b portfolio during the same time period, the performance (net of 140 basis points in fees) would have been even higher.

 

Fees should be one of the factors when using a 403b, however not the only factor.

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If you read any of the books written by Boogle, Swedroe, Berstein, Ferri among others you will find that cost does matter. The academic findings that these authors present illustrate this.

Remember , an aditional 1 percent charge over a 25 year period plus load introduction account for 30% of the investment. Of course diversification, risk, etc are important, but is the additional cost for advise worth 30 percent of a portfolio. Thirty percent of say, 300,000 dollars at retirement is 90,000. Please don't tell me that the sales agent provides this amount of service. If you do, will you also sell us the Brooklyn Bridge.

Chad, the examples that you present is over a short time period, may be exceptions to the rule. Even if they are not exceptions, how do you know which fund will outperform in advance. You don't. Also the more successul funds that you mentioned have low probablity of matching over an extended time a simple no load index fund that charges 0.20 a year.

 

FT, I wonder which funds you are invested in and at which fund company. They must be exceptional funds, and your asset allocation the best. Also can you mention the the name and qualifications of the terrific sales advisor that you that you use so others can contact him.

 

Ira

 

Ira

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