Investing and Ameriprise: Are the rats deserting the ship?

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I just saw an article that made me shed real tears. If I understand it correctly a klatch of Ameriprise brokers (okay, “financial advisors”—ha!) are suing their employer for mismanaging their 401(k)s by forcing them to invest in Ameriprise funds.  The claim is that these funds charged excessive fees. Omigosh, what a surprise. Aren’t these the same funds that Ameripriseniks foist on their hapless clients? If Ameriprise’s own employees know they’re junk, how on earth in good conscience can they peddle this to hapless consumers?

I don’t know how members of the brokerage industry can live with themselves.   After endless press about the shenanigans and abusive sales practices of the brokerage industry, people are still convinced that that doesn’t apply to their broker. “But he’s such a nice guy” is what I hear all the time. Of course he’s a nice guy—he’d never sell anything if he were a troll. And that is exactly what he is—a salesman. They’re not allowed to recommend anything not being pushed by the company, they have to meet sales quotas or they’re out, and 90% of their customers don’t have a clue what they’re invested in. If the customer did have a clue, they’d be investing with a low cost brokerage instead and not accumulating a fistful of mutual funds with horrendous loads and management expenses and a crazy basket of goofball stocks and rip off insurance products. (BTW, Ameriprise was, once upon a time, American Express financial advisors until they came under so much bad press and regulatory scrutiny they changed the name. Catchy, huh?)

 In fact, a lot of them lately have been populating the CFP® classes. Do you think this is because of their tender concern and desire to be more competent for their clients? Do you believe in the Easter bunny? No, because it’s another way to hoodwink clients into thinking they’re getting something extra for those commissions and fees.  Or as one of them told me at my CFP® exam prep class—“It’s all about gathering assets. I’ll never use this stuff in my job.”

Whenever I get together with fee-only planners, I hear nothing but tales of the horrendous investments foisted on clients by their nice-guy brokers. In fact, I’m still waiting to hear a tale about a good, well managed and appropriate (low fee) portfolio designed by a Merrill-Edward-James kinda guy. But why is this? Are we as consumers all dumbbells?

No, this post is about outrage, not shame. I really don’t have any problem with commission sales, as long as the buyer can understand the product and knows what the actual cost is. I was totally okay with commissions when I sold real estate 20 years ago—people can evaluate the house or condominium, everyone knows what the agent is being paid, and the product and service are pretty easy to understand. Mortgages, maybe that’s another story. Did people make poor decisions and go against advice? Sure. Did some people go way beyond what they could afford? Not if they listened to me.

But the current mess in the housing industry really has its roots in the same kind of sharp practices as what the brokerage industry has always lived by.  There’s always someone trying to figure out clever and complicated ways to separate you from your money. And let’s not ignore the factor of greed—without that, none of Bernie Madoff’s victims would have been cheated.

We live in a complicated world, and most of us are already more than busy just trying to keep up with our own field. Keeping up with the financial and investing world is, believe me, a full time job. And as anyone knows who’s ever tried to hire a carpenter, or a plumber, or a nanny, finding reliable help is no easy matter.

Three simple rules would save a lot of people:

  • know how much you’re paying and think about whether that’s a fair price for what you’re getting;
  • be able to explain the investment, how you’ll make money from it, and why you’re choosing it;
  • if it seems too good to be true, IT IS.

A financial advisor should be very clear with you on how and what you’re paying for, and you owe it to yourself to understand any recommendations and keep asking questions until you do. That’s real smarts.

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Exchange Traded Funds—friend or foe?

Gold Key, weighing one kilogram is used to acc...

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Come up with a good investment idea and it seems someone will always figure out a way to exploit it. So, here we have exchange traded funds (ETFs), which have ultra low management costs, trade like stocks and follow indexes just like mutual funds. Financial planners love ‘em for asset allocation plans, even if the average investor hasn’t quite come around. But the crooks have—just ask the guy from UBS that recently lost billions on the trading desk, trading guess what? And why is that guy smiling as they lead him in handcuffs in and out of court? I’d like a look around his apartment—closet, floorboards, mattress.

Every good investment idea lately seems to be seized and corrupted faster than normal people have a chance to understand it.  Still, I think ETFs can be a great component of a sensible portfolio. Some ETFs, like those at Vanguard, are simply different share classes of the same mutual funds Vanguard has been running for years. If you stick with that type of ETF, there are several advantages for the long term (not day trader, not crazy, not nervous Nellie) investor:

  • Rebalancing is much easier and more precise because you know the exact price of the shares you’re moving
  • You get a much lower management cost for the same market basket as the mutual fund
  • They’re more tax efficient because the manager doesn’t need to cash in shares every time somebody wants their money—the only capital gains are the ones you generate yourself, for yourself, by selling your personal shares (unless the underlying index changes, at which point the manager may do some buying and selling)

There are a few things to be careful of, however:

  • Go with a company you’ve heard of. Everyone and their brother has an idea for an ETF, and some of them are too small or thinly traded to have a real market.
  • Choose one based on a recognized index. The smart guys have figured out that calling something an “index” fund is a great way to deceive the Main Street investor who’s heard that index funds are a good thing. Anyone can make up a market basket and call it an index. Make sure the underlying index has some validity.
  • Be very careful before buying one of the so-called active ETFs. They haven’t been around long enough to have any track record. I’m no fan of “active” investing anyway.
  • Check how closely the trading price clings to the Net Asset Value (NAV). This has been a problem with bond funds, which don’t trade on an exchange like stocks. Some experts think you should stick with mutual funds for ETFs. Be aware that some ETFs can also vary from their NAV especially in specialty asset classes or highly volatile markets. During the flash crash there were some real roller coaster moments.
  • If you have to pay commissions, you may be just as well off going with a mutual fund. If, however, your account offers free trades on ETFs, they deserve consideration

ETF investing has some real advantages, but like all investments your individual picture should be examined with a financial planner. You need to consider your own level of knowledge, risk tolerance, and current investments before seizing any “great idea”.

And will someone tell me why that UBS guy is smiling?

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College Financial Aid Planning—Deadlines coming up!

College aid forms can seem about as friendly as a 1040, and maybe even more upsetting emotionally. Plus, there are two of them most of us have to fill out—the FAFSA and the CSS Profile. If you’ve been reading this blog you know I advocate submitting the FAFSA on the earliest possible date, or as close to January 1st as you can. But here’s a shocker for most people: if your kid is applying for admission to any school early decision or early action, the school may require you to submit the CSS Profile by November 1st of senior year. For a list of schools that require the Profile in addition to the FAFSA, you can look at the second page of the Profile info from last year.

Be sure you check out not only the application deadlines but the financial aid deadlines. For example, last year Stanford’s early action deadline was November 1st, but their deadline to submit financial aid for early action was November 15th.  However, at the University of Chicago this year, the deadline for early action admission and for financial aid for early action applicants is November 1st.  But whoa, the Profile is only available beginning October. 1st. You’ve got some fun times ahead!

If these financial aid application deadlines are a surprise, well, it points out how important it is to start college financial planning early. Time after time I hear people say, “Well, I don’t have to start yet, my kid is only a freshman in high school”. Wrong! You need to start the intensive part at least that early, but you should ideally take “early action” when your child is a toddler.  The earlier you start, the more likely you are to accumulate savings, and the more flexibility you will have to adjust to changing circumstances. The earlier you start “late stage” planning (at least by first year of high school) the more strategies you can employ to lower your out of pocket costs.

Okay, your student is a senior. What can you do now? You still have about one month to make changes if necessary—contribute to a Roth or IRA or fund an HSA for example. Spend this weekend assembling your 2010 taxes, doing an initial run through of your 2011 taxes. Contact your accountant if necessary, but you can often get an adequate picture if you can match your current figures to last year’s. The Profile will need to be revised after you have 2011 taxes completed, but schools use this first look to tentatively budget their financial aid and give you an early estimate of what you might be awarded. If you have to estimate, estimate on the honest low side (the side that makes you look poorer). And don’t depend 100% to the penny on what the estimate says—it’s not a final offer.

Now would also be a good time to write any letters documenting special financial circumstances—job loss, divorce, illness. In some situations, schools will require documented evidence from a third party. For example, if a non-custodial parent cannot or will not fill out the required document, some schools will require backup information from a disinterested third party.

My best advice is to see a financial planner for help. (What were you expecting?) An early look at your specifics can save you thousands of dollars either by increasing your eligibility or lowering your out of pocket costs. A plan in place can also help you avoid investment and retirement mistakes—college costs can have a domino effect on all family finances. Let’s get going!

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