March 28, 2004
I support full disclosure as long at it is truly full disclosure. It is only fair to compare apples to apples. For example, investors need to be aware of the long term costs involved with wrap or managed accounts. A managed account can typically charge 1.5 a year Suppose that within this account there is 100,000 in mutual funds. The client purchases A shares at NAV, with no upfront commission. They are, however paying 1.5 a year to the broker, and the internal fees to the mutual fund, say its 1. Over a 20 year time period assume that the market returns a conservative 8. While their investment has grown to slightly over 280,000, they have paid over 92,000 in fees. Of that, the broker has earned over 55,000. If the market returned 10 the historical average the total fees would have been over 115,000. Compare this to buying the same A share mutual fund outside of a managed account. With the front end sales charge being on average 3.75. The investor would, in effect be starting with 96,250. Assume the same mutual fund management fees of 1. Over 20 years at an 8 return the fees are about 42,000, and the investment has grown to 366,000. That is more than 50 less in fees. and the broker only has made 10500 25 basis points over twenty years. Its no wonder many brokers try to steer people into managed accounts, 55,000 or 10500, hmm...
My main problem with this potential rule is that it forces brokers, who are truly looking after the long term interests of their clients, report the 3750 front load, whereas the broker of a managed account, which has no front end charge purchased at NAV, has nothing to show. Managed account advisors should also be required to project the true costs involved. Mutual funds should not be allowed in managed accounts. The ongoing fees involved in mutual funds are to manage the money, the advisor should not be paid for this.
In summary, full disclosure is fine, and welcomed, as long as it is fair and equitable.