Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: MONDAY, April 12, 1993 TAG: 9304100032
SECTION: BUSINESS PAGE: A-8 EDITION: METRO
SOURCE: MAG POFF
DATELINE: LENGTH: Medium
BROKERS PAID FOR BUYING AND SELLING
Q: Last year I retired and received a $70,000 lump sum distribution from my company. Of this amount, $30,000 was taxable and $40,000 was not. I knew nothing about money management, and a friend recommended a stockbroker to help me.I am 55 years old, so the $30,000 had to be rolled over into an IRA to avoid a 10 percent tax penalty. This being my life's savings, I asked him to invest in something of low risk.
He set up an IRA account for the $30,000, which he invested in a couple of diversified open-end funds sponsored by the brokerage where he is employed. He invested the $40,000 in American Funds and Delaware Group.
He said nothing about fees, and I thought you only owed when you sold the shares. I kept a total shares times price per share record, and with my second monthly statement I was already in the red. I still am.
I didn't know they had added a sales fee to the stock price until I read your Money Page of Feb. 22. I then began to try to find out about my investments.
Reading the prospectus mailed to me a week or so after the transaction, I found the sales fee was included in the stock price (5.75 and 6.1 percent), and all these 12-B1 [promotional] fees were added: 0.66, 1.18, 1.9 and 2.14 percent. From the prospectus, I understand you are charged these 12-B1 fees monthly.
I have already lost several thousand dollars through this transaction and feel maybe the 10 percent tax I tried to avoid will be eaten up in brokerage fees and I will still owe the tax.
Would it be wise to cash in these funds and invest in no-load funds? Or should I leave it alone since I have already paid the sales fee and hope it will balance out in time. I get a small pension, which I try to get by on for now, and own my home. But future repairs, auto and unexpected expenses will have to come from my savings. I have to try to make this money last my lifetime.
Also, where could I find information on stock and bond language, such as open end and no load? I have no idea what these terms mean and would like to learn, even though I may be a little late in doing so.
A: When it comes to the up-front commissions and charges, you might as well consider staying where you are because you have already paid the sales commissions. That money cannot be recovered, so you have nothing to gain by selling after the original transaction.
In your situation, the routine fees are the more important factor because they must be paid year after year. Funds with lower annual fees tend to perform better than the more expensive ones.
Open-end funds are those that issue new shares and grow in assets as more and more people invest. Most mutual funds are open-ended. Closed-end funds have a limited number of shares which trade like stock on an exchange. The fund does not grow.
No-load means there is no sales fee up front.
Ideally, people research investments and inform themselves about money prior to receiving large sums. Then they are in a position to choose their own investments without paying a sales fee.
By your own statements, however, you were not sufficiently informed to invest your money at the time you retired. You believed that you needed the services of a broker to make recommendations and thus had to pay a fee for his advice. It is generally understood that brokers earn a commission for buying and selling securities.
The funds you mentioned are reputable, although the in-house funds owned by your brokerage are rated as mediocre by most publications that grade them. The others have performed well in the past.
The 12-B1 fees are high in some cases; they should not be over 1 percent, or at least not much over that amount. You should consider getting out of the funds with higher 12-B1 fees unless the prospectus shows historic yields large enough to offset the fees.
The broker also did you a favor by putting your money in mutual funds, preferably funds with some diversity. If you had put all of your money in bank certificates, it would not grow and inflation would wipe out the purchasing power of your money over the next 25 years.
As for reading material, consider personal finance magazines, such as Money and Kiplinger's Personal Finance. You will learn the language and see how funds perform comparatively over time.
You will also see that different funds have various investment objectives. Examples are aggressive growth funds, balanced funds and money market funds. If you find that you lack diversity, you may be able to switch among your families of funds at no charge.
Mag Poff will help find answers to your personal finance questions. Send them to her at the Roanoke Times & World-News, P.O. Box 2491, Roanoke 24010.