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FundSource from Wachovia


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12 replies to this topic

#1 deathtaxesnoles

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Posted 23 February 2004 - 09:25 PM

My financial advisor is trying to get me to invest in a plan from Wachovia call "FundSource." Minimum investment is $25,000. It allows switching mutual funds without front or back-end fees anytime you want. But there is a 1.5% fee. Is it a good deal and what else can I do with that $25,000. I already have an IRA.

#2 John G

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Posted 25 February 2004 - 03:06 AM

You do not provide enough information to respond, and I did not find this in a quick look at Wachovia.

When choosing mutual funds, here are some questions to ask:

1.) what is the focus
2.) who manages the fund and for how long
3.) front end or back end loads (commissions)
4.) annual expenses
5.) turnover rate of portfolio
6.) annual custodial fees (if any)

Motley Fool has just run some articles on the hidden expenses of mutual funds. They made an interesting case that stock commissions are not disclosed as annual expenses.

I have no problem with the minimum investment of 25k. I am surprised that more mutual funds have adopted a high minimum to avoid the expense of very small accounts.

I am wondering if this is one of the new "in vogue" fund of funds... a mutual fund comprised of many other mutual funds which means you have layers upon layers of annual expenses. Fund of funds are ussually a horrible investment.

#3 John G

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Posted 25 February 2004 - 03:08 AM

One option you could consider is buying a broadly based index fund with ultra low annual expenses. Most brokerages offer something that has expenses below 0.4%... with Vanguard leading the way with sub 0.2% annual fees. Unfortunately, Vanguard prefers direct sales, so you won't see them on many brokerage mutual fund lists.

#4 mbozek

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Posted 25 February 2004 - 08:28 AM

The question is what are you getting for the 1.5% ($375 the first year) other than the opportunity to invest in the funds. Are you getting advice on how to allocate the funds among the different asset classes and are the classes well represented? Are you paying to invest in funds that are not actively managed such as index funds which can be purchased directly from Vanguard for .20-.30%fee a year? As previously noted there may be hidden fees and expenses in addition to the annual charge. You could also see how the funds perform by checking Morningstar or some other service.
mjb

#5 John G

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Posted 25 February 2004 - 01:19 PM

If you can provide an internet link, I will look over the package. It might take a few days to get back to you.

#6 deathtaxesnoles

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Posted 25 February 2004 - 07:47 PM

He sent it to me in a spiffy Wachovia FundSource folder: a printout from morningstar on the 9 mutual funds they would invest the 25K. They all look good in my estimation. Two are closed to new investors but he said NOT closed to Wachovia.

Here they are but he can change them at any time and I can pick whichever I want but I'm more likely to take his advice:

American Funds Amcap AMPFX
Bridgeway Ultra-Small Company BRSIX (closed to newbies)
Clipper CFIMX
Hotchkis and Wiley Large Cap V HWLIX
Matthews G & I (closed to Newbies)
Nations Marsico 21st Century NMYAX
RS MIdCap Opp RSMOX
RS Parters RSPFX
TCW Galileo Value Opp TGVOX

I am getting advice on how to allocate the funds among the different asset classes.

In regards to mutal funds fees, he said "all mutal funds have unpublished fees and even Vanguard doesn't really have THAT low of fees, even though they are one of the best."

No Front or Back end loads with any Mutal Fund I buy/sell.

#7 John G

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Posted 26 February 2004 - 12:33 AM

OK, I will take the plunge.

First, the comments on Vanguard are inaccurate self serving comments from a salesperson. The Vanguard index funds (because of the nature of index funds) have minimal staff, no site visits and low portfolio turnover. Some of their funds have annual expenses below 0.20% and it makes other industry people very annoyed because anything that involves research or advice can not get that low.

Second, don't be seduced by the package. You need to spend some time figuring out exactly the expense ratios and transaction fees you may have. Some funds have many classes of shareholders with different expenses. It is not easy to determine this... it is buried in the fine print.

Third, these funds cover many different investment styles. Think of a matrix of company size (large, med and small cap) on the one hand and investment expectation (value "I think this is underpriced" vs growth "I think this firm is successful and getting much bigger"). Be wary of chasing the hot performance of 2003. For example, many small and mid caps had a torrid year. Good years are often followed by weak years, so chasing performance can give you below average results. No one can accurately predict which sector or industry will do best this year. {I have been waiting for a turn around in Japan for a decade.}

Fourth, they all appear to be no load, but you may have the "broker" versions with different expense percents... you need to ask. Performance on most were good but some have only been in existance for a few years.

Fifth, there are over 8,000 mutual funds. There are lots of choices that are "open". Financial firms close funds for various reasons. Sometimes to sell other products. Sometimes because a successful fund has problems maintaining its success as it grows bigger. "Closed" should not be confused with worthwhile.


Some key points on individual funds

American Funds Amcap AMPFX
Large cap growth, started less than 3 years ago. Did not beat S&P500 for the time periods I was looking at. Index fund might be better since 0.82% is easily 1/2 percent too high.

Bridgeway Ultra-Small Company BRSIX (closed to newbies)
Small cap blend stategy, duplicates TSPFX

Clipper CFIMX
Concentrated large cap. May duplicate Marsico fund. 10 largest holdings comprise 50% of fund. ALSO 26% cash - so you are not fully invested. Mostly is riding financial and consumer stocks right now... concentrated in two sectors.

Hotchkis and Wiley Large Cap V HWLIX
Achieve a very good 11.8% annual over 10 years, with 1.08% expense rate which is decent. This is one of the oldest in the group, since '87.

Matthews G & I (closed to Newbies)
no info readily available

Nations Marsico 21st Century NMYAX
Little to say here as this one is relatively new.
Street.com said this: Nations Funds is launching the Nations Marsico International Opportunities fund, essentially a broker-sold clone of the freshly minted and no-load Marsico International Opportunities fund.....
Like its no-load counterpart, the fund will be a high-octane growth portfolio run by Jim Gendelman. He follows a concentrated approach, similar to that of firm founder Tom Marsico.... (formerly of Janus funds)
Concentrated investing -- the practice of holding a small number of stocks -- can yield big returns, but can also sink a fund in a hurry when those stocks head south.

RS MIdCap Opp RSMOX
I do not like this one at all. 400% turnover, 1.53% expense ratio, performance can be summed up as one great year in 2003 (54%) but the other years are subpar. Mid cap growth. Skip this one in my opinion.

RS Parters RSPFX
Since '95. Performed well, but the 1.88% expense ratio is high. Small cap blend overlaps with BRSIX. Not excited about this one.

TCW Galileo Value Opp TGVOX
Good performance, but some stats indicate this is a higher risk fund. Since 97, mid cap blend strategy. A small amount here would mitigate the more risky portfolio appoach.

Before you decide, read over the comparable stats for the funds. Wachovia should make this readily available. Ask about the exact expense data for you and any transaction costs or fees.

You might do just fine by picking 5 non-overlaping styles and dividing the 25k up equally. I would not be surpised if just one low expense general index fund might do just as well.

Info on these funds can be found at brokerage sites and fund websites.


I had fun looking up some new fund names and spent about 2 hours reading the performance and portfolio data. It is educational if a little boring to some. I doubt your "advisor" knows as much about these funds.... but that is a different story. You might want to ask him/her if "they are all fully invested". Some are not.

Is there a fee for the "advice" you are getting? 25K is a very small account, even if it seems like a lot to you. Do not expect to get a lot of time after you commit to the plan.

#8 richardl

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Posted 26 February 2004 - 09:30 AM

You should consider negotiating your fees downward. Morgan Stanley has a similar program but the minimum investment is $10,000. The annual fee can be negotiated as low as 1%. There are funds from over 15 fund families to choose from, well over 125 individual funds, and automatic rebalancing into different asset classes on a quarterly basis if requested. There are no front or back end charges, no fees to transfer and all investments are in A shares. If you would like further details, there are additional facts, please let me know.

#9 mbozek

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Posted 26 February 2004 - 02:33 PM

Isnt this discussion an excellent illustration of the principle that differences in the cost of financial products is largely due to the cost of the distributon system used to deliver the product. An IRA can be funded with index fund from Vanguard for 20-30 basis points or purchased from a full service broker for 100- 150 basis points or inside a Variable annuity for 200 + basis points + commission costs. This is no different than the sale of bundled products to pension plan sponsors which generate revenue sharing. I am not saying that the best product is the cheapest product but that a customer who pays more for the product should get additional service/value for the additional cost. The problem with price comparisions in financial services is that the providers are reluctant to disclose the actual costs to consumers.

I do have one question on the Wachovia funds- is the 1.5% fee all inclusive or is it in addition to the management fee charged by each fund?
mjb

#10 richardl

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Posted 26 February 2004 - 04:43 PM

This is an excellent illustration between full service and on-line investing. Some observations:
1. I don't know of any service business that presents the actual cost to their clients. The cost of the service and product are difficult if not impossible to differentiate when giving advice is connceted to a product sale.
2. The key is not the company that you deal with in a full service firm but the individual that you choose as an advisor.
3. It is difficult to argue with the fact that the more wealthy investors use financial advisors. This is even though many wealthy investors are capable of doing it themselves and they didn't become wealthy by throwing money away. They consider a financial advisor as an insurance policy.
5.The advantage of a wrap fee program like the Wachovia example is that the fee is based upon the assets in the account. If the value of the account increases the fee increases, and vice-versa if the account value decreases. The advisors compensation fluctuates based upon the performance of the investments he recommends.

As to the question about the Wachovia advisory fee and the mutual fund management fee, my limited knowledge of the Wachovia program is that the mutual fund management fee is separate from the Wachovia fee.

#11 John G

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Posted 27 February 2004 - 01:03 AM

Good catch on the 1.5% fee vs the fund fees. If additive, this package is not going to perform very well since almost 3% will be coming off the top each year. {the same is true of many funds of funds... which gives you two layers of fees in most cases}

I know and work with about 30 very wealthy people (3M to 25M in assets) and to the best of my knowledge only one uses an investment advisor... so I have a trouble believing the comments about wealth customers tending to use advisors.

There is a big difference between a high end advisor and the average retail guy you might find in most cities. My impression is that maybe 2 in 10 retail level advisors is worthwhile. I have sat in on some meetings with them and reviewed "reports" they provide customers - it is mostly canned stuff from the main office, designed for marketing. You can have some fun asking questions like which class mutual funds shares are listed and get a lot of squirming. I have very limited experience with the high end advisors, I sure hope they are better.

A friend of mine is the single best stock picker I know and has for a few years been the chief equity analyst/selector for a hedge fund in Manhatten. Last time I visited him, he pulled no punches. He remarked that he was surrounded in his mid-town offices by dozens and dozens of "advisors" and asset managers who "would not survive if they had to rely on their own investment skills". I was a little surprised by this and he commented that most of these "experts" make their money by babysitting assets and taking a small percent of the total each year, not actually making great investments. That is his view not mine, but I found the observation to be interesting.

My life experiences have taught me a tough lesson. The single best person to research, track and decide about investments is you. I legal terms you have the ultimate "standing", 'cause it is your money. It is hard to imagine anyone has a greater interest in your financial future than you do. For one thing, you don't have any conflicts of interest with YOU.

Edited by John G, 27 February 2004 - 01:10 AM.


#12 richardl

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Posted 28 February 2004 - 01:54 PM

My last input on this topic is that only a fool has himself as a client.

#13 John G

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Posted 28 February 2004 - 06:32 PM

Richard - thanks for the alternative viewpoint.

I am not arguing that an investor has all the natural or god given gifts to make decisions. No one I know was born that way.

Of course there are lots of resources at the investor's disposal: the WSJ, financial mags, Value Line, Morningstar, Uncle Lou, websites, and financial advisors to name just a few. What I am arguing against is the tendency for some folks to abdicate the decision making to others and rely completely on their expertise. The financial interests of a saleperson, banker, broker or financial advisor are often driven by commissions, portfolio turnover, performance quotas and sometimes contrary positions on a specific investment.

I believe the tax payer has the ultimate responsibility for making investment decisions. In legal terms.... they have standing. It is their money and their future.

I will give you an example of how things go wrong when a person lets someone else make these decisions.

I was asked to review the decisions of a major brokerage with regards to the account of a 85 year old widow. The customer had a rudimentary knowledge of investing, and knew the difference between stocks and bonds. When she opened this account she had told the brokerage firm that she needed this pool of assets to supplement her retirement income and did not want to take high risks. Other than owning a home with 2 apartments, this brokerage account was the only other asset. The brokerage had the women give them decision making power over investments. The firm passed this account to someone with less than five years experience. The account rep put this person into many different investments including international tech funds, narrowly cast sector funds, and a fund that said they were momentum players. There was not a single broad based equity fund and not a single investment designed to produce income. All of these investments had high commissions. The account value dropped substantially, and the customer called the rep multiple times to urge a more conservative approach. After five years she had less than 35% of her original assets and pulled all funds from this broker. My findings were that the firm assigned this account to a person who did not have sufficient training or experience, that the firm did not supervise this young staffer, that the account rep made decisions completely contrary to the investment style requested, that the account rep chose high commission investments when less expensive investments were available, that the account rep failed to respond to questions and redirection guidance. I also found that absolutely none of the investments chosen were suitable for an 85 year old widow needing income supplement. The arbitration settlement restored less than 1/3 of the damage done by the broker.

Sure, there are investment advisors that do a good job. My experience suggests that they are modest in number and hard to find.

A quick survey of the problems presented at this website shows that a large number come from consumers who do not spend enough time to understand the tax code, understand their investments, read the account agreements, confirm that actions get posted, etc. The "Pogo" factor applies.

Richarl, it sounds like you believe in delegation. I take the position that greater involvement by the consumer is wise. Those positions are not complete mutually exclusive.