AMEX Mutual Fund

[Guest BigAl]

As a follow-up to my previous post, does anyone have experience with American Express Mutual Funds family, concerning performance, expenses, etc.? My financial advisor is with AMEX, and I will be rolling over my 401K to him shortly. I would like to stay within the AMEX family so that distribution dates for each fund can be more easily avoided since my advisor will be more in-tune with each funds dates.

[John G]

You will find much of what you are looking for at American Expresses web site:

http://www10.americanexpress.com/sif/cda/p...95,00.asp#INDEX

and also a full list of funds at:

http://br2.americanexpress.com/trade2/tool...ery.asp?fam=AXP

Did you advisor tell you that Amex has five no-load index funds?

AXP S&P 500 Index Fund

AXP Mid Cap Index Fund

AXP Total Stock Market Index Fund

AXP International Equity Index Fund

AXP Nasdaq 100 Index Fund

If he did not, I would wonder about the degree to which his advice might be biased towards commission based products. Amex has about 45 loaded funds and the only no-load funds are the index funds. Amex does a pretty good job hiding the actual loads and fees - I think you have to go to the prospectus which is a document that must comply with more standard reporting and less PR. A quick look seems to show that the no load versions of their funds have annual expense of around 2.8% which is very high. The loaded versions subtract 5.75% on the front end and then tap you for 1.25% every year. Ouch. Compare that to 0.17 to 0.32% expenses index funds in Valley Forge which have no load.

The five no-load index funds look a little better but still have annual expenses that are about 2x or 3x the comparable expenses at Vanguard. You might want to download the actual prospectus to make sure "expenses" are properly cited. The difference between Amex index and the Vanguard index may be about 0.4%, but over decades this difference would amount the thousands of dollars. You might be better off buying your advice on an hourly basis then to "Ka-ching" pay for it through higher expenses every year.

I don't understand what you are saying about distribution dates, but if you are talking about capital gains distributions... they have no impact at all for mutual fund shares within a retirement account. There is no reason to avoid or even think about the capital gains distribution dates for any funds held by an IRA, Roth or 401k.

[QDROphile]

And if your financial advisor is so valuable to you as to justify such big hits to your investment returns, why didn't he or she explain all of this to you, including the irrelevance of mutual fund distribution dates when the funds are in a tax exempt vehicle? For the big money you should be getting excellent service, advice, candor and integrity.

I would feel better about an advisor who explained that the funds were more loaded with loads and management fees, compared them to some others for you, and then explained why you should pay more -- the advice, service, etc. I don't think you will find that the AMEX fund returns are better than comparable funds with lower charges, expecially on a net return basis. You advisor should demonstrate this and either prove me wrong or otherwise justify what you are paying for.

The advice you get may well be worth paying for, and even paying a premium. But you should evaluate that separately and based on a clear understanding.

[John G]

I think quantifying the differences expenses might make on your 401k might be instructive.

You did not tell us the rollover amount, but I am going to assume $200,000 and that this money may be invested for 25 years. From Amex web site it looks like their no-load index funds may have expenses of 0.39 to 0.79% depending upon which index fund and what share catagory applies. I am going to assume a blended expense level of 0.6% for Amex. From Vaguard's web site I find the annual expenses of their S&P500 index fund at 0.18% and their Total Market index fund at 0.20% and I will use 0.20% for these calculations. I assume that the underlying stock market rose 10% a year before fund expenses.

Comparing Vanguard approach to Amex after 25 years: you would have about $180,000 more with the lower cost Vanguard, which reflects a difference of just 0.4% in annual expenses. You can scale that up or down to match your actual rollover... but it sure looks like a big premium to me.

Lets take this number crunching a little further. Same 25 years, same 200k rollover, same underlying stock market return of 10%. Comparing Vanguard S&P500 to the 2.75% loads of some of Amex's actively managed stock funds. Here, the difference assumed in the annual drag on investment return between V and Amex is 2.55%.

The results are ugly. After 25 years, you would have $919,000 more by investing in an ultra-low expense Vanguard index fund compared to the Amex higher annual expense actively managed funds. I ignored any front end load with Amex actively managed funds.

A couple of caveats: the applicability of Amex loads/expenses depend upon which share class applies and is far from clear even after reading their web site summaries. However, they have many funds that have expenses above industry averages, so the comparisons are instructive. I use these firms and funds for examples only, I neither support nor oppose any of these funds and have no financial interest or any other connection to either firm.

There is a quantifiable cost of turning over your investment thinking to a "professional". I have given you some examples of how I would attempt to qualify the different results using an HP 12c and 10 minutes of crunching numbers. I am willing to rerun all the scenarios if you post more specific information.

[Guest BigAl]

John G, thanks so much for your time and help. I will be a bit more specific with the information I have. The 200K rollover number is right on target. My time investment timeframe is 15 years instead of 25. My advisor suggested back loaded funds, class B, to avoid the front load charges. If B shares are kept for about 8 years then there is no fee, however, the first 2 years are 5%, with a gradual slide to 0% at the eigth year. He says that I obviously don't have to stay with Amex funds, but he knows them better, and that would be an advantage in my other cash accounts, because he will be able to avoid the capital gains distribution taxes. Also, with the B shares, I assume it is o.k. to move from one fund to another within Amex family and still not count as a withdrawal from the fund. Eight years may be a long time to stay with the fund. The no-loads do look attractive. As you mentioned, the Amex "expenses" also appear high, as most funds range as high as 1.73%. He says that his goal is to seek returns of about 8% per year. I will ask him if that means after all expenses, etc. I thank you in advance, if you can rerun the numbers for me, and any other suggestions you may have, as to what you would do in a situation such as mine.

[MGB]

If this is a rollover into an IRA, why would there ever be "capital gains distribution taxes?" There shouldn't be any (these distributions within an IRA and reinvested are not taxed), and his statements that you should be in this arrangement just to avoid them is VERY misleading, if not outright fraudulent.

BigAl, you didn't mention your age, but said you have a 15 year horizon. If 15 years is when you plan to START to receive distributions in retirement, then you have a much longer time horizon than 15 years. Someone age 65 right now and healthy, has a 20 to 25 year expectation of receiving distributions. Assuming they are taking out the money continuously throughout their lifetime, the average time horizon for all of the investment is about half of that, or 10 to 15 years. You should not focus on when you retire, but when you will be receiving the money.

[Guest BigAl]

Thanks MGB, on withdrawing funds during retirement. Perhaps I wasn't clear on the "capital gains distribution". I had meant that statement to apply to the other taxable accounts, that my advisor will be managing. Is it wise to know, and avoid those dates in ataxable account? Exactly how should those gains be handled?

[John G]

I agree with the above comments on the investment hold period. If you are 50 years old now, you could easily be invested for 35 years. Perhaps you should post: your current age, the age you expect to retire, the age you would need to tap into this rollover.

I think you were talking about capital gains distributions from funds outside of IRAs. I would focus more on the validity of the investment choice and less on the tax issues. Changing your investments to avoid taxes can be very counter productive and take your eye off the more important issues.

Your advisor should have told you about tax managed funds. For example, the Schwab 1000 is like an index fund except that at the end of the year they sell some down stocks to eliminate any capital gains or even dividends, and I don't think they have had any taxable anything in many years. Did your advisor tell you that index funds are by their nature less likely to cause capital gains? That is because they don't switch stock picks unless the underlying list changes and with continuous growth they are rarely compelled to sell anything. If your advisor has not communicated these rudimentary facts to you, then I suggest that he/she is not very knowledgable or is not allocating much time to your issues.

How do you handle taxable events from a mutual fund? Every year you will get a statement from the brokerage/fund and it will divide up the various taxable amounts. Accompanying that statement will be information explaining the form. You or your accountant will then plug that data into a computer program or the Schedule D to create your 1040. {the short answer} When you transfer funds to avoid a capital gains distribution, you cause another taxable event and it will probably be short term gains.

The 8% target is a fairly conservative number. In my mind that would represent a 60% stock 40% bond portfolio on low expense funds. In the mind of your AMEX rep, that might represent a 10% stock market return minus the 2% expenses of the Amex funds.

Back end loading: A phased out back end load sure beats a front end load and it looks like you would keep the funds for enough years. You should SPECIFICALLY ask if you can transfer between similiar funds... my guess is yes... but you should not guess but find out. I personally would not go the route you are proposing because of the rather high expense ratio of the Amex funds. So far, you have not convinced me that the advice you are getting is worth very much... your advisor seems to be leaving out a lot of information that you should know.

Give me some additional data on age/years and I will crunch the numbers again. You might want to add some comment on how much interest you have in learning about investing and monitoring your assets. If the answer is zero, then Amex approach might make some sense, but I would not expect a lot of personal attention after your assets arrive at Amex. (you get a lot of attention during the sales phase) Any modest effort on your part would allow you to make better long run investment decisions.

[Guest werty]

Oh quit blabbing about index funds. If the professionals on this board were so concerned about expenses, they would be suggesting Exchange Traded Funds (ETFs) based on market indexes like the S&P500 or the small and mid cap value and or growth indexes.

ETFs absolutely kill the expenses of index mutual funds. For non-IRA accounts, the taxes work out pretty good too. The ETFs trade like stocks throughout the day. Unlike mutual funds, you can protect the downside risk of a really bad day in the market (9/11/01) by placing stop orders at price levels below the initial purchase price of the ETF (thus limiting your potential losses). Or you can hold it for 20 years and genrally pay lower internal fees when compared to indexed no load funds!

An Amex advisor can purchases ETFs, stocks, bonds, loaded mutual funds (without the sales charge) AND NO LOAD FUNDS inside a WRAP account (at AXP its called SPS Advantage). There are no trading costs or nor up front commissions to the client, however the advisor does charge an annual fee for assets under management, typically of 0.75% to 2.00% (average about 1.00%). Amex (the comapany) keeps any where from 20% to 40% of the fee - the advisor gets the rest as compensation for manageing the account.

With a WRAP account your advisor can help you select the best fund (load or no load), ETF, or security for your needs and help you manage it.

And yes, you pay a fee. Call it 1% per year and crunch those numbers - its probably more expensive on a buy and hold for 20 years scenario - which is stupid by the way. I can't tell you the number of "No Load Investors" that are riding thier no load index funds into the ground when simple strategies to prevent losses could be employed (if done by an advisor probably costing 1% per year - but with uneducated investors losing 20% since the beginning of this year - that's 20 years of advice you could have paid for)

If you are a do it yourselfer - by all means do it your self and use ETFs with stop losses over No Load index funds. If you want to pay for on-going annual advice, seek an advisor that can purchase virtually any investment under WRAP structure (and charges an annual fee).

[John G]

Welcome to this message board werty.

I have some problems with your post. Exchange traded funds are hardly a panacea. The first problem is that the average investor does not know about them, and posters on this message board are often learning the basics. The second problem is that you left out some key facts.

From NAZDAQ's web site on ETFs:

Do I get paid dividends and/or capital gains?

Exchange Traded Fund holders are eligible to receive their portion of dividends, if any, accumulated on the stocks held in trust, less fees and expenses of the trust.....

No high management and sponsor fees. Expense ratios are very similar between ETFs and open-end mutual funds. Usually, they range from .18% of the value of the fund to .84%

From Morningstar web site:

Costs

In terms of the annual expenses charged to investors, ETFs are considerably less expensive than the vast majority of mutual funds. SPDRs, for example, recently reduced their annual expense ratio to just 0.12%. IShares' annual expense ratios range from 0.09% for iShares S&P 500 Index, to 0.99% for several of its iShares MSCI Series offerings.... Still, investors need to put these numbers in perspective. On a $10,000 investment, you'd save just $9 a year by choosing iShares S&P 500 Index fund over Vanguard 500 Index Fund VFINX.....

The expense advantage of ETFs may also prove to be more mirage than fact for most investors. That's because you must pay commissions to buy and sell ETFs, just as you would for stock transactions.

Concerning SPS Advantage... from Amex's own web site:

"Over the long term, SPS Advantage will be more expensive than buying mutual funds with front-end sales charges. In exchange, however, you’ll receive added convenience, specialized services, and ongoing advice from a financial advisor" {note they say more expensive than a loaded fund, which means it is a lot more expensive than a no load or index fund}

"The SPS Advantage fee is a percentage of the total value of the mutual funds and securities in the account. Underlying products may have their own fees and expenses."

There is a wonderful footnote in 6pt type that reminds the careful reader that 12b-1 can be layer on top of the annual fee. So fees on fees. I sure found it interesting that Amex did not specifically identify the overall percent subtract each year on the web pages that explain this account.

My take on your proposals:

While ETF's have some nifty features, claiming that they "they kill the expenses of index mutual funds" vastly overstates their positives. Note the key phrase "expenses of the trust" and "commissions to buy and sell" above. Also note that Morningstar does not say ETF "kill" index funds, rather they say they beat most mutual funds, which for the expense ratios they are talking about means actively managed funds.

I also marvel at this statement you made: "I can't tell you the number of "No Load Investors" that are riding their no load index funds into the ground when simple strategies to prevent losses could be employed". That sounds suspiciously like something a broker would say. I would argue there are no simple strategies to prevent losses - this is an illusion. I have never met anyone who can consistently identify a bottom or a top for a specific stock, a sector or the market in general. You are sure to generate wonderful commissions for a broker when those trigger points are reached multiple times in a month. I have never seen any simple strategy that can be universally applied to financial markets under all conditions. The academic studies have demonstrated that annual performance tends to decline with frequency of trading. Investing has a very large cemetary for fool proof ideas that were mostly fool and little proof. You don't hear much about the "dogs of the dow" anymore - to name one theory that had 15 quarters of fame.

If you want some credability on this message board, be honest with your facts and skip the "blabbing" comments. If you review the range of comments on this board you will see that posters are not likely to know a lot about spiders, puts/calls, straddles and other more advanced investment techniques. The audiance for this message board does not show any great interest in intraday trading either.

Index funds are one of the mechanisms investors should understand. In my opinion index funds tend to outperform all but a tiny fraction of the actively managed funds. That ETFs also have some of these attributes does not diminish what I have said about index funds.

[Guest BigAl]

Hi John G. I'm getting back to you with a bit more info. I'm 56 years old, and plan to retire in 10 years. At that time I would probably need to withdraw about 1,000 per month from the initial 200K rollover. If you can run the new numbers, it will be greatly appreciated. Also, I have found out that I can swap Amex funds and not incurr a sale, for the back-end loads. Can you answer on the benefit of avoiding the capital gains distribution dates in my TAXABLE mutual fund accounts? Is it a good idea, or let it ride?

[John G]

Avoiding taxable gains: I would not recommend this as your first priority, I would worry about the investment choice first. If you sell a fund to avoid long term capital gains you often trigger short term gains at a higher rate. Yes, you could end up owning a fund with huge imbedded capital gains and you don't want to pay tax on this now if your personal gains are slight or non-existant. But that is a pretty rare specific case.

New number crunching on new facts: Assumptions, age 56 now, retire at 66, either you or your spouse may live to 96 and so you might want to see a 30 year income stream. Math based solely on 200k rollover. Assuming that stock market over next ten years averages 10% annual return. Comparing three initial choices: investment choices that have expenses of 0.2%, 0.6% and 2.0%. These would compare to ultra low index fund like Vanguard, Amex no load index fund, or back end medium expense Amex managed fund. (you need to confirm the specific share classes that would apply and the total annual expense ratios)

At retirement, age 66 the rollover would grow to $431k, $491k or $509k depending upon the net annual returns of 8%, 9.4% and 9.8%.

At that point, you would have no problem pulling out an income stream of over $1,000. For example, lets convert the age 66 predicted assets of 509k (top scenario) to a flat 30 year income stream. If you shift to more conservative investments like 70% bond and 30% stock at retirement, you could expect to average about 8% return. Over a 30 year period you could draw about 50k per year, exhausting the funds completely when you hit 96 years. Four caveats: first, these numbers do not factor any inflation impact so the real value to you in future years would be less... you might assume a 1/2 todays purchasing power, but that is just a rule of thumb. Second, you would probably prefer a gradually increasing income stream rather than level. That is a spreadsheet job, not a simple calculator. Third, investment returns vary year to year and your result will move up or down depending upon where the good and bad years appear. Four, earlier lump withdrawals to cover special bills are not considered.

These are just some general scenarios of how your hard work might play out in retirement. It is very hard to predict 10 years into the future, much less 30+ years. However, I think the exercise gives you important feedback for your planning. You need to factor in pension, SSN, home equity, cash/CDs and other assets to get a more complete picture.

One of the points I was originally trying to demonstrate was the impact of choosing higher expense funds. As you can see above, just a 0.4% reduction in annual return costs over $18,000 over just the first ten years and this grows to about $78,000 if the difference is 2.0%. The difference grows much larger over the next 30 years in retirement if you still have the higher expenses problem.

Hope this has been useful.

[Guest BigAl]

Thanks again, John G. Your info is a great help. As I said before, I am new to mutual funds. I usually by individual tech stocks in my smaller IRA's, but with this larger 401K rollover, I need a more conservative, diverse investment. When I next meet with my Amex advisor, I will discuss many of the items you mentioned, prior to the rollover.

[John G]

You will get more attention from any broker if they think you are considering an alternative firm or indicate you are willing to switch teams if you don't like the service. I would talk with Amex before you move the money. You will find that their interest in you may dwindle once the funds are in their vault. It is a natural tendancy of sales forces to focus on the next deal.

You should drop by your local library and look at what they offer in investment basics books. The March issue of Consumer Reports each year has a very good general article on retirement planning and mutual funds that is written in laymen's language. Most mutual fund families have material on the web to evaluate individual funds with top holdings, asset mix, and other features. There are a lot of outstanding investors that are self taught, a process that is measured in decades rather than weeks.

Good luck.

[John G]

Another article on ETFs:

http://biz.yahoo.com/smart/020403/20020403...03fundfaqs.html