Investor Beware!!!
Allen Holdsworth
B I Volunteer Advisory Board Online Classes 1
Investor Beware!!!
Allen Holdsworth
BIVA Board Director
Illowa Buy States Chapter Director
BETTERINVESTING BIVA Board Classes
Disclaimer
• The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting™National Association of Investors Corporation (“BI”) or the BetterInvesting Volunteer Advisory Board, its volunteer advisory board (“BIVAB”). The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvesting™ or BIVAB. Investors should conduct their own review and analysis of any company of interest before making an investment decision.
• Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any BetterInvesting programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the President of BetterInvesting or the Manager of Volunteer Relations.
BETTERINVESTING Online Classes
Investor Beware!
• Allen Holdsworth
• MAD Investment Club-14 yrs
• Illowa Buy States Chapter Director- 13 yrs
• BIVA Board Director- 5 yrs
BETTERINVESTING Online Classes
Investor Beware!!!!
• Taught classes for last 13 years
• Read LOTS about finance and investing
• Teach “Personal Investing” class at local community college
• Financial Advisor/stockbroker 7 yrs
• Retired Dec. 2007
BETTERINVESTING Online Classes
Investor Beware!
• Teach many classes through the local libraries
• Teach many classes online
• Have taught at last 4 BINCs
• Will teach several classes in St. Louis- June 2010
BETTERINVESTING Online Classes
Investor Beware!!!!
• Do what is right for the client!!!
• That is what ALL brokers should do.
• BUT not all of them do that.
• What should you watch for?
Investor Beware!!!
Allen Holdsworth
B I Volunteer Advisory Board Online Classes 2
BETTERINVESTING Online Classes
Investor Beware!!!
• LOTS of pressure at most brokerages to sell
• Do what is right BUT sell, sell, sell
• I always wondered how many gave in to the pressure and sold what was NOT right for the client but WAS right for the company or the broker
BETTERINVESTING Online Classes
Investor Beware!!!
• Be sure to understand how they get paid
• Ask for choices for your investments
• If you use a full service broker, then you should expect to pay for his help
• Sometimes the best choice for your situation will make the most money for the broker-but not always
BETTERINVESTING Online Classes
Investor Beware!!!
• Have a goal or a plan for your investments
• Do you want growth?
• Do you need income?
• Are you worried about taxes?
• Get your goals and time frame written down
• The broker SHOULD ask about this and help
BETTERINVESTING Online Classes
Investor Beware!!!
• Once you have a plan in place then:
– Always ask how each investment recommendation fits with your plan
– You should be given several choices each time
– Discuss those choices and choose what fits best
BETTERINVESTING Online Classes
Investor Beware!!!!
• How liquid do you need your investments?
• A small percentage of illiquid can be OK
– Annuities
– Public non-traded REITs
– Oil and gas investments
– Limited partnerships
BETTERINVESTING Online Classes
Investor Beware!!!
• Some brokers only use annuities or life insurance
• You should work with someone who can handle stocks, bonds, mutual funds, annuities, and maybe even insurance
• They should give you choices as to what might best meet your needs
Investor Beware!!!
Allen Holdsworth
B I Volunteer Advisory Board Online Classes 3
BETTERINVESTING Online Classes
Fee based accounts (wrap accounts)
• Charge a percentage fee of assets each year
• No commissions or transaction costs
• ALWAYS good for the broker and his company
• SOMETIMES good for the client
• Usually a fee of 1% to 2% or even higher
BETTERINVESTING Online Classes
Fee based or wrap accounts
• Since the broker gets more money if the value of your account goes up- he says that now you are both on the same side of the table
• I say- “Why weren’t you both there to start with?”
• Do what is right for the client!!!!!!!
BETTERINVESTING Online Classes
Wrap accounts
• Could be good for you IF:
• You trade a lot
• The annual fee would be less than the commissions
• They use no-loads or ETFs
• Can buy load funds with no load charged
• For MOST people it is MUCH more expensive
BETTERINVESTING Online Classes
Wrap Accounts
• Sometimes no activity until near year end
• Window dressing
• Example of unethical behavior
• Sometimes the best thing to do-is nothing
BETTERINVESTING Online Classes
Front end load funds
• A Shares
• Front end load-pay fee up front
• Lowest annual expenses
• Fee decreases as investment amount grows
BETTERINVESTING Online Classes
Front-end loads- American Funds
Investor Beware!!!
Allen Holdsworth
B I Volunteer Advisory Board Online Classes 4
BETTERINVESTING Online Classes
Fees and expenses
• $100,000 @ 3.5%= $3500 one time fee
• Annual expense avg. .6%/year= $600
• After 10 years
• $3500 + (10 x $600)= $9500 total
BETTERINVESTING Online Classes
Wrap account fees
• $100,000 x 1% per year= $1000
• Avg. fund expense on ETFs= .3%= $300
• After 10 years
• $1300/year x 10 = $13,000 total
• $3500 MORE in fees than using
the load fund
BETTERINVESTING Online Classes
Fees and expenses
• $250,000 x 2.5% = $6250
• $250,000 x .6% = $1500/year
• $6250 + (10 x $1500)= $21,250 total
• Wrap account
• 1% x $250,000 = $2500/year + $750/yr.
• 10 x $3250 = $32,500 ( $11,000 more)
BETTERINVESTING Online Classes
Fees and Expenses
• Do it yourself
• ETFs and Scottrade
• Buy 8 different ETFs @ $7 a trade
• Annual expense avg. of .4%/year
• Invest $100,000
• 8 x $7 = $56
• $100,000 x .4%= $400/year x 10= $4000
BETTERINVESTING Online Classes
Fees and expenses
• Invest $100,000 for 10 years
• Fees and expenses for 10 years
– DIY= $4056
– Load fund= $9500
– Wrap Acct.= $13,000
BETTERINVESTING Online Classes
Share classes
• A shares-front end load
• B shares- back end load
• C shares- 1% per year fee
Investor Beware!!!
Allen Holdsworth
B I Volunteer Advisory Board Online Classes 5
BETTERINVESTING Online Classes
Share Classes
• A Shares
• Front end load
• Lowest annual fee
• Brokers sometimes split money between several fund companies so do not hit the breakpoints
• Good for broker-bad for you
BETTERINVESTING Online Classes
Share classes
• B shares
• C Shares
• I can think of no good reason to use either one of these share classes
BETTERINVESTING Online Classes
Lifestyle Funds
• Funds of funds
• Fees on top of fees
• Based on your age/years till retirement
• Not a good choice
BETTERINVESTING Online Classes
Annuities
• Can be good investments in the right place
• Very high commissions
• Fixed
• Variable
• Index
BETTERINVESTING Online Classes
Fixed Annuities
• Fixed
• Like a tax deferred CD
• Usually has minimum % earned
• Can go higher
• Long surrender periods
• High commissions
BETTERINVESTING Online Classes
Variable Annuities
• Variable results
• Invest in stock market
• High annual expenses
• 2% to 3% or higher
• Many bells and whistles
Investor Beware!!!
Allen Holdsworth
B I Volunteer Advisory Board Online Classes 6
BETTERINVESTING Online Classes
Index Annuities
• Index annuity
• Compared to an index
• Cannot lose money
• Mediocre returns
BETTERINVESTING Online Classes
Annuities
• Lots of abuses in selling annuities
• People do not understand them
• High expenses
• High commissions
• Avoid brokers where annuities are all they sell
• Abuse of friend by annuity person
BETTERINVESTING Online Classes
Life Insurance
• What kind do you need?
• How much do you need?
• How long do you need it?
• Whole life vs. term
• Term is MUCH cheaper
• Bigger commissions on whole life
BETTERINVESTING Online Classes
Life Insurance
• Many abuses
• My own example
• Mother died-daughter was sold three life policies from three different brokers though she had no dependants- no economic benefit to herself-big commissions
BETTERINVESTING Online Classes
Life Insurance
• NEVER buy life insurance as an investment!!!!
BETTERINVESTING Online Classes
Bank Trust Departments
• VERY expensive
• Example
Investor Beware!!!
Allen Holdsworth
B I Volunteer Advisory Board Online Classes 7
BETTERINVESTING Online Classes
Changing Brokers
• Happens a lot
• Easy to do
• May be some fee from old broker
• Transfer in kind rather than liquidate and transfer
• Father-in-law story
BETTERINVESTING Online Classes
Investor Beware!!!
• NEVER give a broker discretion-the power to trade as they see fit without telling you until after it happens
• Churning can be a major problem
BETTERINVESTING Online Classes
Investor Beware!!!
• Protect yourself
• As you get older, ask if you can have a son or daughter along to hear your broker
• If they refuse- RUN
BETTERINVESTING Online Classes
Investor Beware!!!
• Keep good records and notes
• The broker keeps notes on clients for two reasons
– To remember what was talked about
– To protect himself
• You should do the same!!!!
BETTERINVESTING Online Classes
Investor Beware!
• If a broker does something you did not authorize:
• Contact the broker first
• Next contact his manager
• Keep pushing till satisfied
• May need to go to arbitration
BETTERINVESTING Online Classes
Investor Beware!!!
• If you don’t understand it-don’t do it!!!
• NEVER give in to pressure
• Any deal that you have to sign right now-is a deal you should walk away from
• Always ask for several choices of investments
• Make sure they understand your goals