Avoid Investor Overload by Asking Questions

Mutual fund investors who have gotten accustomed to better than 30 percent gains over the last five years may be in line for some frustration this spring.

Even if investors’ account balances go stagnant because an expected economic downturn curbs growth, they still face the likelihood of taxable gains on individual stock dividends within the fund. As a result, investors could wind up with just as big a tax bill as they had during a year of extravagant returns — similar to the way a Presidential candidate could win the popular vote but lose in the electoral college.

Tack on sales loads, recurring fees and charges from frequent stock turnover, and the pitfalls of mutual funds become painfully clear. Troy Kestner, AXA Financial Advisors’ Springdale branch manager and vice president, said none of this means that mutual funds have outlived their potential.

The key is simply sticking with an investment plan that outlines investor goals.

“Focus more on investment strategy and risk-tolerance,” Kestner said. “We look for the figure our client will be comfortable investing at, then figure out which investment options and pricing structures fit that plan.”

Kestner, whose office manages more than 1,000 local mutual fund investors’ assets, said information is the operative word. Before investing, clients should establish a relationship with their financial adviser and feel comfortable enough to ask lots of questions. Preparing for tax liability and fee assessment is simply part of that process.

But sometimes knowing what to ask is difficult. Rebecca Garner, president and chief investment officer of Garner Asset Management in Fayetteville, said that’s why it’s important to always cover the basics. That way, a given fee never comes as a surprise.

“If you don’t ask, then shame on you,” Garner said. “You should know what you own. The loads will always be spelled out, usually in great detail, in the information. You just need to look at the paperwork. That way, you’re never surprised.”

Two of the most popular funds locally, the American Washington Mutual Fund — known as “aw-shucks” because of its AWSHX acronym — and the AIM Balanced Fund, come with whopping 5.75 and 4.75 front-end loads, respectively. Their Class A shares require less management, however, so their management fees are less.

By comparison, the Alliance Balanced Shares Fund invests in Class C shares and has no front loads. But its expense ratio is much higher at 1.96 percent.

All of them come with 12b1 fees, which basically means that customers are paying to have the funds marketed to them.

“Even with no-load funds, you’re going to pay to have your money managed,” Kestner said. “It’s just a question of how. Without a clear-cut idea of what you’re trying to accomplish, you’re probably not going to have a clear-cut idea of why you’re paying a fee for a certain service. As long as investors get value for the fee and clearly understand what it’s for, they don’t mind paying it.”