FundSource - Conservative Growth Optimal Blend - V3

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FundSource - Conservative Growth Optimal Blend - V3

Postby RenoJay » Mon Apr 29, 2013 9:41 pm

I have a friend who informed me the other day that, upon the advice of an advisor, she put 80% of her assets into the stock market. (Never mind that she sold out of the market in 2008, and bought in 2013, thereby missing a 100%+ rally.)

I'm trying to research the fund the guy sold her so I can inform her of its expenses, loads, etc. but I can't find any detail. Can anyone help? Here's the fund:

FundSource - Conservative Growth Optimal Blend - V3

What should I tell her about it/her adviser? (And yes, she DID ask for my opinion.)
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Re: FundSource - Conservative Growth Optimal Blend - V3

Postby pkcrafter » Tue Apr 30, 2013 12:42 am

It's a proprietary fund (not good) and your friend is probably paying for a wrap fee. Who's the advisor? Really doesn't matter, it's definitely the wrong way to go.

Paul
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Re: FundSource - Conservative Growth Optimal Blend - V3

Postby pingo » Tue Apr 30, 2013 2:22 am

It looks like the fund may be more like 60% stocks / 40% Bonds:

FundSource PDF

Well, okay, there are tiny slivers that include commodities, REITS, High Yield and Emerging Markets bonds, but they appear to be reasonable amounts, assuming they stick to the allocations.

I don't like the active portfolio management aspects of it. Also, I found a link where someone discusses an 0.80% expense ratio for one of the portfolios, plus a 1.5% fee paid quarterly. (See Doubts About My Financial Advisor.)

So, let's say total expenses are 2.3% per year even though hyper-managing a portfolio can create significant transaction costs, too. It means that pretty much all investment dividends go straight into FundSource's wallet. She'll never see them. Close to half of the portfolio is bonds (40%). How does she expect to obtain income from bonds when FundSource is pocketing most of the dividends?

She must ask them if they really believe they will outsmart the thousands of other really smart managers (i.e. the market) to the tune of 2.3% every year without fail. (Talk about an unlikely task!) They must outperform by 2.3 percentage points every year in order for her to keep up with market indices. FundSource stacked the odds against themselves and then thought it was a great idea to sell it to her as a winning strategy.

Standard & Poors publishes the returns of active managers versus the indexes every year. How do they refute S&P's claims to the superiority of index returns over active management? How do they refute the fact that overwhelming balance of academic literature concludes that low cost index funds are the only way to go?

-How do they expect her bonds to make her any money when FundSource is pocketing most of the dividends?
-How do they expect her to make competitive returns on stocks when those dividends are also pocketed?
-Have they shown her past returns of their portfolios?
-Are they actual portfolio returns or theoretical portfolio returns?
-Are they before expenses or after expenses?
-Have they compared those returns to a benchmark of indexes in the same proportions as their portfolios, or did they compare entire portfolios to the S&P 500 alone, which is completely inappropriate? In other words, one should only be comparing the S&P 500 to the 35-50% of the portfolio that is likely to be invested in Large Cap stocks. Regardless, the possibility of a portfolio of active funds beating an equivalent portfolio of index funds is next-to impossible, per Rick Ferri's research for The Power of Passive Investing. Rick gives us the rundown in these links:

Index Fund Portfolios Reign Superior

Morningstar Video Reports: The Power of Passive Investing

Rick's YouTube advert
Last edited by pingo on Wed May 01, 2013 8:06 pm, edited 4 times in total.
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Re: FundSource - Conservative Growth Optimal Blend - V3

Postby RenoJay » Tue Apr 30, 2013 10:09 am

Thank you! This is great stuff. I copied the posts above and emailed to my friend, along with a need infographic I found about how fees are the enemy of returns. Here's the graphic:

http://www.pbs.org/wgbh/pages/frontline/business-economy-financial-crisis/retirement-gamble/how-retirement-fees-cost-you/
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Re: FundSource - Conservative Growth Optimal Blend - V3

Postby pingo » Tue Apr 30, 2013 11:04 pm

Edited my last post a little.
Last edited by pingo on Fri May 10, 2013 9:40 am, edited 1 time in total.
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Re: FundSource - Conservative Growth Optimal Blend - V3

Postby pingo » Fri May 10, 2013 9:40 am

In case you missed it, PBS Frontline did a documentary piece called "The Retirement Gamble" that might interest your friend. I think it makes all this investing gobbledygook very simple and palatable. There's a link in the thread to see the video online.

If she needs a good "hook", you can advance the video to 19 minutes and 50 seconds where they begin an easy to understand treatise on "The Tyranny of Fees" , which interviews Jason Zweig and Jack Bogle (of course!), and which points out that 2% fees when there are 7% returns means that after 50 years of putting up 100% of the capital and 100% of the risk, one ends up with only 30% of the return! There are also good bits on inappropriate investments sold to trusting people by experts financial advisors salespeople and the interviewer confronts JPMorgan and Prudential the superiority of Index returns versus costly active management.

All the best!

:beer
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