Nov 21, 2019
Well! Hi everyone, this is Dan Thompson wise money tools. Glad
you could join me on this wise money tools video. So I got a quick
question for you. Are you capable of picking your own mutual funds?
Now that might sound kind of silly, but I started as a financial
advisor back in 1986. Yep, old guy, little gray here. Now, if you
work for a big firm, what happens on a fairly regular basis is you
get these guys coming into the office. They're called wholesalers.
And it happens a few times a month. A wholesaler is basically the
sales force of a mutual fund company. And what they do is they come
in and they tout their mutual funds tell you how wonderful they
are. They take you to lunch, give you a pin, a cup, some sort of
trinket and off they go. It's kind of taken for granted if a
wholesaler shows up that management wants you to sell their
stuff.
Now this can be a conflict of interest is certain extent because
oftentimes a mutual fund company will either pay a fee or give a
kickback to the brokerage firm to push their funds. Now, they do
this and it's all legal. But what they do is they call it a due
diligence reimbursement. See, the brokerage firm has to pay an
employee of sorts to analyze the fund group. And so the fund group
will pay them for that due diligence. Well, there were a few
wholesalers that came in while I was in my first year, and their
stories were amazing. I felt like I couldn't go wrong selling their
funds. I remember one wholesaler coming in. I guess this was about
3 or 4 years after I'd been in the business is around 1990. And he
had this big pitch for their China fund. And that in China was
going crazy at the time and their fund was up 45% for the year. And
he said to all of us, he said, Now this is just the beginning.
China's here to stay.
This is where you want to put your money. I know about 3 months
later, he showed up to the office. And he was touting their blue
chip large-cap fund. And I remember asking him, I said, Well, last
time you're here, you're talking about the China fund. How's it
doing? Well, luckily, I had never sold any of it, because he was a
bit uneasy. And he sheepishly admitted that it was down 90% and
they closed it, closed it and I just felt like I dodged a bullet.
Had I simply follow the wholesalers push, my clients would have
been toast. Sadly, way too many brokers in my office had sold their
clients to China fund. So that brings me to the point of this
video. What happens to these funds when they close? Where does the
money go? See a mutual fund company won't keep their dogs very
long.
Because they don't want them on their books. There's a stat that
indicates that there are over 32,000 mutual funds that have closed,
okay? Now they may have closed due to lack of interest, they may
have close to bad management, they may have close to performance,
or they just didn't have enough sizzle to keep them exciting. As
with the China fund, there was a lot of sizzle for the sell. But as
soon as the sizzle was drowned out, most of the assets were lost
and the fun closed. Now they don't have to put it on the books, but
there's still a little bit of money in there. So what happens to
that money? Well, what they do is they typically roll what's left
of your assets into another fund. Then they send you this letter
that says now you're the proud owner of their new high flyer fund,
right?
Well, there are lots of reasons and excuses to make you feel all
warm and fuzzy and that they did the right thing. But the reality
is what they did is buried their dogs. So suppose there are two
funds. One has a 10% return each year for the last three years. The
other one has like a 2% return and then a negative 5% the last
year. And you own the one that lost money over the last three
years, what the mutual fund company can do is closed that dog. Keep
saying dog, I love dogs by the way, and they roll those funds into
the good one and hide the horrible returns of the other one. Now,
here's where it gets a bit deceiving. So again, they give you a
nice letter, explain the move, and now you're the proud owner of
this new fund. But remember, you own that horrible fund for 3 years
previously, right?
However, now your money is rolled into the new fund. And at the end
of the year, you get a statement that shows the last 3 years return
as if you'd been in that fund. Well guess what? Somehow all the bad
returns are wiped out gone. Your statement shows you've done 10%
for the last 3 years, even though your actual account value shows
dramatically otherwise. Now, this happened about 32,000 times in
the last number of years, maybe not all of them for horrible
returns. But still the history is wiped clean. And you're now part
of the history of the new fund that you're that they rolled you
into, even though you did not experience that history. I guess I
point this out, because what did the broker that sold you the fund,
know that You didn't know? Oftentimes, not much more than you could
have read for yourself.
In other words, brokers are subject to being sold a bill of goods
by these wholesalers, just like they then turn around and sell you
a bill of goods. With the research you can do on mutual funds these
days in about five minutes. There really is no good reason to pay
And to buy a mutual fund from a broker. Did you know that at the
end of 2014, there were over 79,000 mutual funds worldwide 79,000
just in the United States over 9600. Korea alone has 11,000. And
India is pushing to over 10,000. Now, here's what's really
interesting though, do you know how many stocks there are in the
United States? Well, in 1996, the US stock market peaked with
issues at 7322. At the end of 2018, we had just over 3600. So those
numbers have been cut almost in half. And now think about this.
There are over twice as many mutual funds in the United States as
there are stocks in the United States. And that's the only thing
that mutual funds can buy. Okay, so back to my point of this video.
Do you really think a broker can pick a mutual fund better than you
see brokers and financial advisors pretty much hone into one or two
mutual fund families. Maybe they like him because of the
wholesaler. Maybe the returns for a particular fund has been good
for the last few years. Or maybe it's the payback that if the firm
gets I don't know, what am I mean by payback? Remember, I was
telling you about the cost kickback for due diligence costs that
many firms receive will brokers and advisors get a few perks as
well. I remember in my second year of fund company invited me on a
due diligence trip.
They flew me to Chicago, picked me up in a limo took me to the
Nippon hotel. I think it's called in downtown Chicago where I look
right at this huge billboard of Michael Jordan from my room. Then
they took me to the finest restaurants. It was just top notch
accommodations. And then we had like a two hour meeting. Where they
talked about their funds, their fund managers and how they analyze
stuff and all that. By the time I left, I was so impressed with the
company. They had this great story nice people. And of course, they
treated me very well. Well, I got back to my office A few days
later, and I did some research. I liked everything about them,
except one thing. They had horrible results compared to other funds
in their competitive group. So how can I justify selling them? The
promise so many brokers justify selling them because of these due
diligence trips.
I talked with a few other guys in the office and they basically
said. Hey, these guys are going to take care of you. And how do you
know that they aren't gonna do better in the future, and you're
gonna be fine, just sell them? Well, I couldn't do it. I just
couldn't sell fund, because somebody took me on a nice trip. Now
this happens several times each year. The courting that goes on
behind the scenes is incredible. Now, I think that's curtailed over
the years somewhat. It used to be much more you know, aggressive. I
mean, some of the trips I've been on to sway me to sell their stuff
have been incredible. The problem is you as a consumer, you have no
idea if the broker you work with is unbiased. Did their research or
if it's a good story, but they are simply paying back the
wholesaler for their weekly visits, and for the little trinkets
they get. And you're never gonna know that which again, takes me
back to my point.
There's no reason in this world that with a bit of research, you
have just as good a chance of picking a mutual fund, as well as any
financial advisor out there. Not only that, you'll save the fees as
well a fee that is completely unnecessary in today's world. Fees
can literally eat up 30% or more of your total return, even if it's
only 1% a year. I hear that all the time. Well, it's only 1% a
year. But if you look at some of the calculations of how that works
out over time, it can eat up as much as 30% of your total return
just for picking a fund. What I think is a better question is this.
Our mutual funds all what they're cracked up to be. I mean, by the
time you look at the actual return, the fees, the taxes, the
manager of philosophy. You may be able to do much better on your
own. Using what we like to do, and that's the Warren Buffett style
of investing, you could potentially dwarf the returns on an
actively managed fund. And it's not that hard.
It's certainly worth exploring. That's the purpose of these videos
to make you, your best financial advisor. The first thing you got
to do is build up your capital so you have capital to access when
it's a good time to be buying. Having cash or capital markets,
correct or even crash is really the secret to Warren Buffett's
success. He says, be fearful when others are greedy and greedy when
others are fearful. There's a little fear out there right now. And
maybe for good reason. We've got a great economy right now, a pro
business, White House company profits are up wages are up
employment, the lowest and 50 years. So there's good reason to be
optimistic. I'd simply say if you aren't invested right now, and
you have the ability to save. It may be the best time to build your
capital base and keep cash. Buffett is sitting on billions and
cash, like 122 billion at the end of last June. He's not investing
much right now. Might be a good signal for us as well.
One of the best places to save and build capital is through our
banking system. It's safe, it's tax advantaged, it's accessible and
ready to be put to work when those opportunities arise. And that's
how you can create wealth with Without taking a lot of risk, and
certainly without rolling the dice and picking the right mutual
fund. Okay, so that's about it for this video. As always, if you
have any questions, shoot me to questions at wise money tools.com.
I'll answer as quick as I can. Don't forget to subscribe. And if
you want to have a strategy session, make sure you click on the
time trade link below. Always love to hear your comments as well.
So feel free to comment below. Be Your best financial advisor,
you're gonna feel more in control, do better with your money and
eliminate ends of thousands of dollars in fees during your working
life. All right, that's it till next week. Take care.