Inevitable Wealth Coaching
3350 Township Line Rd.
Drexel Hill, Pa. 19026
Ph. 610-446-4322
Fx. 610-789-4927
e-mail address: brendan@coachgee.com

Saturday, November 15, 2008

Mutual Fund Reps Baffle Congressman Sestak

INEVITABLE WEALTH NEWS
November 2008

Congressman Asks Mutual Fund Companies For Full Disclosure of Investor Expenses;
Their Response Is, “That’s Not Important. Investors Wouldn’t Pay Attention To That Information.”

My wife and I were finishing our Breakfast in the Country Squire Diner the Sunday before the election.

A gentleman approached the table and I thought he was just going to ask for some change. I have to admit I did not recognize the gentleman at first, but as soon as he mentioned his name, Joseph Sestak, I knew who he was.

A couple questions about redistribution of wealth, taxes, and Afghanistan led to an interesting conversation.

After asking what I did for a living the Congressman told me that a short time ago he had a meeting with representatives of two large mutual fund companies. I know you have seen their ads.

One of the topics the Congressman was trying to shed light on was how confusing it was for investors to figure out how much they are being charged by mutual funds to have their money managed.

To his disappointment the answer to the Congressman’s question from both company’s representatives was that is not important for investors to know because they wouldn’t pay attention to that information.

I shared with him that mutual fund companies do not like to have conversations about costs for several reasons.

First, if kept in the dark, investors do not know what they should be paying and have no reason to complain. Second, if investors are kept in the dark about expenses investors cannot ask mutual fund companies to justify their costs in light of their returns.

Third and most important if costs were completely in the open, investors could begin to legitimately inquire about the value they are receiving for their money.

Are they truly benefiting from the fund managers expertise in knowing which stocks to buy and which ones to sell?

How astute are their fund managers in knowing when to get in and out of the market would be another question that would come from full disclosure of expenses.

I shared with the Congressman probably the biggest reason mutual fund companies do not want informed investors.

I shared him about a passage in the Prudent Investor Rule which was authored by the American Law Institute in 1990. From the legislation which governs the investment of trusts and retirement plans in this country it states “Bargain shopping, in an effort to identify winners and exclude losers through forecasting of performance, is simply deemed wasteful.”

You could imagine an industry whose profits hinge on the belief that they have an expertise in picking stocks and timing the market that is worth paying for to be a little hesitant about giving the investing public too much information.

Congressman Sestak gave me his personal e-mail address and asked me to send him that passage from the Prudent Investor Rule which I agreed to do.

By the way, I mailed it to him that very afternoon. It was my way of trying to reach across the aisle.

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