I realize this is Jim Cramer. Any comments on the points he's making?
https://www.cnbc.com/2017/09/07/cramer-these-costly-funds-could-be-ripping-you-off.html"If you are an investor who owns mutual funds, Cramer says you're probably getting hosed. There is just no other nice way to put it."
- CNBC's Jim Cramer ticks down common mistakes made by investors when buying a mutual fund or ETF.
- If you're an investor who owns mutual funds, Cramer says you're probably getting ripped off.
- The "Mad Money" host did make one exception to his issue with funds.
Comments
For me to own these "low cost" etf's that Cramer speaks of I will need to hold these type of investments in a wrap fee based account. The fee on wrap accounts that I have looked at charge about about 1% (and up) plus there are the fees on the "low cost" etf's themselves that has to be considered to compute total expense cost. This puts the total cost at about 1.25% and in some cases more. Currently, there is no wrap fee on my accounts and Morningstar estimates my total expense ratio at 0.75% on all my mutual funds when combined. So, for me, to go Cramer's "low cost route" I'll actually wind up paying more by about $5,000.00 (perhaps even more) annually over what I currently pay. Seems, to me, Cramer forget to mention that many firms now charge wrap fees on accounts that hold these low cost etf's that he speaks of. Nope, for me, I plan to continue to hold my American Funds plus some others as I have now done for many, many years in no fee based accounts. Plus, I can do net asset value (nav) exchanges between funds I own inside their fund family without any charges.
For me ... After looking at this a couple of times over the past couple of years I'm still thinking I've got the low cost deal. Pehaps, you do as well?
One of Cramer’s shots is at the extraordinarily large number of funds. I think he has a point here. Heck, just with TRP where I’ve invested for quarter century I’m confused by the hundreds of funds and what exactly distinguishes one from another. Their latest attempt to play off the success of PRWCX with a milder income-focused version of that fund is but one example. Others have noted that they appear to have two different lines of retirement funds competing against each other for investor assets. Personally, I’m able to ignore most of that clutter and maintain a rather short list of six or seven funds which I have long held there.
And, how can one argue with his logic on fees? Of course owning individual stocks (which he suggests) rather than mutual funds would reduce the cost of being in the market. What he doesn’t say is that people invest in funds because it’s an easy (and initially cheaper) way to get the diversification they desire as compared to buying small slugs of hundreds of individual stocks. Also, through retirement plans (like the IRA) many with minimal investment knowledge are first introduced to investing. In this case, a “half-loaf” (funds & fees) may be preferable to no bread at all (not investing).
Where I might argue with Cramer is his assertion that fund companies have no incentive to perform well, since fees are derived from AUM rather than performance. That’s true to an extent; however, by performing well (and rising in value) the company’s funds do serve to increase its AUM (and revenue) over time - albeit indirectly.
Agree with your overview. I have not watched or read Cramer since the market melt; and only then were a few days off and on during the market melt of 2008. I did not watch "his" show, but portions when he was at the desk with others in the morning.
His linked write here shows me his appears to be in a disconnect with today. I also won't argue that there remain too many funds that over charge and under perform.
But, this circumstance is upon the backs of individual investors to be at least a little bit curious and studious to discover fees and performance, but it on their own or via a managed account.
A few thoughts, somewhat along this thread line.
However, it remains that the individual investor of the type likely found here are few and far in between, of all individual investors; IMHO. Yes, there are millions who hold monies in IRA, 401k or 403b accounts, but my experience is that a very small percentage have much knowledge or desire to gain the knowledge. My current personal reference point is from questions I still receive.......as to, what do you think about this or that? These family and friends don't know anyone else who has had "their face" in the markets for 40 years.
One question from 2 months ago went like this, no quotes: My adviser in Ann Arbor thinks I should sell some or all (she couldn't remember) of my healthcare holdings. Oh, when did you switch advisers and why. A few years ago; because a friend felt she did a good job. Okay. What is the percentage of your healthcare holdings related to "all" of your investments? I don't know. Why does she feel you should sell? I don't know. Give me a list of your investment holdings by category (no dollar values for your privacy) and we can review your market positions. Okay. Still no follow up.
I suspect this is typical. Not to point a finger towards an adviser; just that too many individuals do not have any clues into the world of money.
As to the accounts type that @Old_Skeet mentioned, needing a brokerage wrap account for purchase of etf's; I will state that I/we at this house are spoiled (from our own choice) as to wide open accounts from 40 years ago into today. Old_Skeet's background of holdings and where they evolved from, over many years, is a different circumstance than we deal with at our house; and his choices will be much different from ours. As an investor, he is in a good place monetary, I suspect. Hats off to you, Old_Skeet for keeping your investment mind to the wheel.
Relative to our Fidelity brokerage accounts; we have access to just about whatever and from whomever without having to deal with wrap account fees. These brokerage accounts have always been "self directed", although one can have a managed account (fee) at Fido.
Strictly from an etf view, Fido has 81 no commission etf's. I imagine this is more than enough for anyone to "build their own", eh? Five standard marketplace equity/bond I-shares etf's have an expense cost of between .04 and .11%. Damn, this is just about free, eh? Fido also offers index (equity/bond) funds with similarly small expense cost.
http://etfdb.com/type/commission-free/fidelity/
Yes, I too; don't quite get Cramer's take on etf's and A.U.M. thing.
I view the AUM chase as having to stay current and in the game. Hell, this is marketing, yes? So, new products are introduced. The percentage investment houses obtain from AUM is fully understandable from a business stand point.
I still call this the "K-Mart" model from 50 years ago, at least relative to large scale retail.
Sell a boat load of product from a tiny markup to generate volume and pull in customer traffic. Bingo. Everyone wins, eh?
The model remains in place today with the likes of Walmart and Amazon, to name two.
The wrap account and input from those who either use or know others who use such an account could be an interesting thread.
I've always been averse to "fees". Several folks I knew in the mid-'80's continued to look at investing with Merrill-Lynch and their funds. I recall the "load" was 7.75%. Ouch! Yes, Fido had loads on some funds then, too; (I have a list in a file) but I recall the most common load for their best funds was 3%. These disappeared as Fido became more aggressive with obtaining AUM.
'Course, the obvious is that these loads + taxes + inflation can pretty much wipe out a gain from a fund, eh?
I apply the same thought to a wrap account, although one is supposedly obtaining some form of investment expertise from an adviser. Better, I suppose in the long run; than not investing at all. The worse case could perhaps be a break even scenario.
Take care,
Catch
Hi Catch. I’m afraid giving most people financial advice is akin to giving them health advice (ie “loose some weight dude”). It usually runs like water off a duck’s back.
(Edit) Having said that ... I am eternally grateful to the co-worker who around 1971 tipped me off about our workplace 403B and recommended the (Templeton administered) plan. Getting started early - even in relatively small amounts - made a huge difference over time.
I just wanted to respond to Catch and Hank's note about people not having financial knowledge or desire to gain the knowledge. I grew up in a poor family in the Midwest. Both my parents worked hard but having money to pay the bills seemed to be what took up most of their time. Investing in the stock market wasn't remotely possible for my family which means there was almost no conversation about investing and managing monies. Flash forward and I was a young writer living in New York -- my "day job" was working as a temp ("word processing" -- remember that nostalgic term?). One of my temp assignments took me to an investment banking firm called The Portfolio Group which was a subsidiary of the old Chemical Bank -- 57th floor of Rockefeller Plaza. They invested money for wealthy individual and foundations. This was the late 1980s. I was just a guy doing word processing around a lot of conversations about millions of dollars. Some of the portfolio managers noticed that I was a curious guy (they knew I was an artist) and offered to tutor me about the stock market. They even convinced me to open an IRA, to fully fund it (it was $2,000 max in those days, I think) -- which I did and continued to do. They gave me articles to read, engaged me in conversations, and made me feel like I was someone who had the right to know more about financial/investing opportunities. That was all I needed -- someone taking an interest in me and my financial future. I've been invested through Fidelity for nearly 30 years now. And that was last temp job I ever had. I've made my living as a writer ever since (which means financially there have been some incredible years and some awful years). It also means I've been self-employed all these years and so my retirement is fully self-funded. One reason I can still do my work is because I invested fairly young and never stopped. But I needed help to not be intimidated. I was lucky to have gotten that help. I just wanted to point out that some folks come from families and places where the very idea of participating in the stock market is not possible. It isn't just laziness or disinterest. (And if anyone happens to read this from The Portfolio Group: thank you!)
Sorry for the long post. I'll now go silent again! Thank you for reading.
I very much enjoyed reading your post, especially as it really reminded me of a similar situation with respect to lack of detailed financial knowledge with respect to our families. One area of financial knowledge that they were aware of though, from hard personal experience through the Depression, was NEVER to go into debt to buy anything except a home. Both my parents and my wife's parents managed to impart that wisdom to us, by example as well as by lecture.
Because of that, my wife and I are natural "savers", so when IRAs (yes, I remember the $2000 max) became available, we had the savings to start investing. We started very conservatively, with savings accounts, as as we gained knowledge of some of the other possible areas of investment we slowly expanded our financial horizons.
There are quite a number of friendly and knowledgeable posters here on MFO, and based on your post in this thread I believe that your questions and observations would be well received.
For what it's worth, here is the definition of a wrap fee per Investopdia. It has nothing to do with purchasing an ETF on your own accord:
Like any service company does. Cramer's CNBC wants him to generate eyeballs, not money directly (that comes from advertisers), but it's the same thing.
"The amount of money they make depends on the size of assets that are under management. That means their biggest incentive is not for an investor to do well."
Cramer seems to be talking about people like himself, paid to draw customers rather than deliver quality service. It's not rare to see fund managers telling their management company to close their fund, because the managers care more about the quality of their service than AUM.
Notice the use of pronouns in the quote. The amount of money the management company makes depends directly on AUM. The amount of money the fund manager makes is a bit more complicated (and usually not disclosed AFAIK).
Several funds incorporate a fulcrum fee. With this fee, a management company takes in more if the fund outperforms and less if the fund underperforms. Presumably some of that is passed along to the fund manager. Lewis had a Barron's article a few months ago on this (cited in another thread), subscription or google search required.
"To make matters worse, mutual funds also charge some of the highest fees in the business."
As a former hedge fund manager, highest fees in the business are something Cramer should know well. Hedge funds usually charge 2% of AUM (way higher then most mutual funds), plus 20% of the gain (with no give back for losing money).
He's just pushing his program (going for eyeballs "under management"): "I figure you can beat the performance of an index fund by picking stocks yourself [but a fund manager can't]. Which is the entire reason I do this show every night." That's from the first video, just 1m long.