Someone Really Is Coming after You

Don’t let the politically driven terrorist rhetoric distract you as we head into the 2016 Legislative Session. There are mass shootings almost every day in America. One or two are foreign terrorist related at most, and with over 200,000,000 guns in this country, it’s small wonder.

Meanwhile there are people out there who want a little piece of your money, every dollar, every day. They are showing up in person and as lobbyists in St. Paul as you read. Here’s some stuff you need to know to be able to make good choices and smart decisions

Look at this article from the New York Times:

Congress Inches toward Completed Spending Bill
By David M. Herszenhorn
Dec. 14, 2015 New York Times

WASHINGTON — Congressional negotiators worked Monday night to complete a $1.1 trillion spending bill for 2016, and an accompanying package of up to $750 billion in tax breaks for businesses and low-income workers.

Republicans want to block some Obama administration environmental regulations and to stop a new Department of Labor rule tightening rules for financial advisers who manage retirement funds.

Now here’s why it’s important. Financial advisers under the Labor Department budget amendment proposal would require financial advisers to be required in the work “in the best interest” of their clients. Keep in mind that “financial advisers” and investment plan sales people who earn fees, like commissions, on your financial transactions, such as 401b and 403b investments, and you are not their client, you are their customer. Some states require FAs to work in the best interest of their clients, and most probably do. Without the requirement that all do, some may work to provide suitable services; if it suits you to invest in a mutual fund that offers a very high return rate, you might take it, but the adviser who’s selling it to you may take as much as a 3% fee on it.

What should you be telling your Congressional representatives?

 

Read this Forbes Personal Finance article to see what that means:

The Heavy Toll of Investment Fees
By Rick Ferri
May 27, 2013

The thought of giving up 40% per year in investment return to pay for portfolio management and advice would cause most people to walk away. Yet, this is the price many people pay when they hire an investment adviser to manage a mutual fund portfolio or exchange-traded fund (ETF) portfolio. Cutting this cost by as much as two-thirds is easily done and highly recommended.

The 40% annual cost is simple math. Take the average expense ratio charged by mutual funds and add it to the average advisor fee, then divide this number by the expected portfolio return before fees. The result is your investment cost. I’ll walk you through an example.

Let’s start with a hypothetical example of an expected portfolio return before fees. A portfolio allocation that’s invested 60% in global stocks and 40% in US investment grade bonds should earn about 5.3% before costs, according to my best estimate. Investment grade bonds are yielding 2.0% based on the Barclays Aggregate Bond Market Index, and this is what you can reasonably expect to earn from intermediate-term bonds going forward. On the equity side, the FTSE Global All Cap Index should earn about 7.5% annualized based on global economic growth and dividend reinvestment.

A 60% stock and 40% bond mix comes to 5.3% before fees; what you earn after fees depends on how much you pay. There are two investment costs in my calculation: mutual fund expenses and an adviser fee. There may be trading costs and taxes to pay as well, but I’ve excluded them in this exercise.

The average expense ratio for actively-managed equity mutual funds is 1.2% and investment grade bond funds have an expense ratio of 0.9%, according to Morningstar. Taken together, a 60% global stock and 40% bond fund portfolio has an average combined expense ratio of 1.1% per year.

The second expense is an adviser fee. The typical investment adviser charges about 1.0% per year on the first $1 million dollars of assets under management. This cost may be higher or lower depending on the amount being managed. Adding mutual fund expenses and adviser fees comes to 2.1% annually.

Your adviser’s fee plus fund fees might be costing you around 4.1% annually; so your rate of return had better be pretty good to make the money you expect.

You absolutely need to be informed. There will be discussion in the Minnesota Commission on Pensions and Retirement about the fees our State Board of Investment pays on our TRA and other public employee pension funds. You need to be able to read the numbers and know what they mean. The truth may sound scary, but you can protect yourself by being informed.

What should you be telling your Legislative representatives?

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Jay Ritterson
15-Dec-15