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Flux Capacitor
Joined: 15 Dec 2009
Posts: 39
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 Posted: Wed Jan 20, 2010 11:55 pm Post subject: Why do financial advisors constantly use American Funds |
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| I have heard from many people who use an advisor that they are always placed with A shares of American Funds. Why so popular? Brand name recognition? Is the AF track record that great? |
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Brewtownphilee
Joined: 15 Apr 2008
Posts: 140
Location: Wisconsin
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| Posted: Thu Jan 21, 2010 12:03 am Post subject: pretty simple... |
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Actually, the performance of many of the American Funds is good, especially considering their size. But, it most likely comes down to one thing: COMMISIONS. Many of their funds have a front-end load. 4-5% off the top of the principle. Yuck. 
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nisiprius
Joined: 26 Jul 2007
Posts: 9264
Location: North America; Western Hemisphere; the Earth; the Solar System; the Universe; the Mind of God
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| Posted: Thu Jan 21, 2010 12:08 am Post subject: |
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Willliam Bernstein has opined that the privately-held firms, like Fidelity Investments and American Funds, seem to be somewhat less greedy than firms with shareholders, and their funds have somewhat lower expenses.
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thenextguy
Joined: 25 Mar 2009
Posts: 240
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| Posted: Thu Jan 21, 2010 2:00 am Post subject: |
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| Yep, it's a combination of good historical performance and 5.75% front loaded sales commission. |
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sschullo
Joined: 01 Apr 2007
Posts: 529
Location: Rancho Mirage, CA
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| Posted: Thu Jan 21, 2010 2:28 am Post subject: |
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commissions
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Steelersfan
Joined: 19 Jun 2008
Posts: 826
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| Posted: Thu Jan 21, 2010 5:49 am Post subject: |
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| Up front commissions plus a little slice of the annual ER. |
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ddb
Joined: 26 Feb 2007
Posts: 4386
Location: Manhattan
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| Posted: Thu Jan 21, 2010 10:30 am Post subject: |
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| thenextguy wrote: | | Yep, it's a combination of good historical performance and 5.75% front loaded sales commission. |
"Commissions" is not the answer. For those advisors who sell class A shares which assess a front-end sales load, there are hundreds of other fund families where they could get the same commission. Also, FWIW, the sales charge is 5.75% up to a $25K investment. If the investment is $100K the sales charge is 3.5%. Over $1 million and the sales charge is zero.
For advisors who sell class A shares on a load-waived basis in a fee-based account, again, there are thousands of other funds they could use instead.
IMO, American Funds sales are still thriving based on their relatively excellent performance in the 2000-2002 bear market (largely a by-product of Capital Research & Management's value style of investing). Most of their funds since 2004-ish have been closet indexers. I think advisors like them because there usually aren't any big negative surprises (exception: the Bond Fund of America was down something like 14% in 2008), they have a great reputation, and they have very low costs relative to other load fund families.
Like the rest of the general public, though, American Funds sales suffer or benefit from recency bias. According to InvestmentNews.com, American Funds experienced net outflows of $21 billion YTD through October 2009, which was the only fund family in the top 5 by AUM to experience outflows. And of course, the biggest beneficiary of the crushing 2008 bear market has been PIMCO, a company known for its bond funds. Shocking!
- DDB
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Brewtownphilee
Joined: 15 Apr 2008
Posts: 140
Location: Wisconsin
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| Posted: Thu Jan 21, 2010 5:05 pm Post subject: yes, but... |
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I agree that their performance is a big part of it. But, aren't they ONLY available through specific advisors? And I believe their network is pretty large, so the chances of coming across one is pretty good when people are searching for "advisors." Perhaps the % of the load the advisor receives is higher. Anyone here with experience buying some of these and asking the right questions?
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Flux Capacitor
Joined: 15 Dec 2009
Posts: 39
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| Posted: Thu Jan 21, 2010 5:10 pm Post subject: Re: yes, but... |
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| Brewtownphilee wrote: | | I agree that their performance is a big part of it. But, aren't they ONLY available through specific advisors? And I believe their network is pretty large, so the chances of coming across one is pretty good when people are searching for "advisors." Perhaps the % of the load the advisor receives is higher. Anyone here with experience buying some of these and asking the right questions? |
I took a look at their funds. They seem to be preferred for these reasons:
a) High sales charge for lower breakpoints, 5.75%
b) Relatively low internal expenses
c) Brand name
d) Asset size
e) Strong performance. |
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Kenster1
Joined: 28 Feb 2007
Posts: 2728
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| Posted: Thu Jan 21, 2010 5:23 pm Post subject: |
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Performance, long-term reputation, relatively low ER and uses seasoned team-managed portfolio managers.
American Funds reminds me of the Primecap team --- strong team-oriented management, relatively low-turnover and fairly introverted in terms of media attention.
In fact, one of the founding members of the Primecap team originally came from American Funds!
$10k invested from 1976 to end of 2009:
VFINX: $271.6k (VG S&P500)
AGTHX: $895.2k (American Funds Growth Fund of America A)
$10k invested from 1996 - 2010 (today):
VGTSX: $19.0k (VG Total International)
AEPGX: $31.4k (American Funds Europacific Growth)
Can't use value-tilting as an explanation because these are not value-tilted funds.
And then American Funds Capital World Growth & Income has done well too with a 10-yr annual return of 7.31%
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Last edited by Kenster1 on Thu Jan 21, 2010 6:02 pm; edited 1 time in total |
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Random Musings
Joined: 22 Feb 2007
Posts: 2410
Location: Pennsylvania
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| Posted: Thu Jan 21, 2010 5:27 pm Post subject: |
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With respect to front-end loads, I would like to add that any ethical advisor who wants to lower the front-end costs to their clients, if applicable, can do so simply by investing in the bond fund (2.5 load or something at high end) and then disburse those dollars out to the other funds. Individuals can do the same.
RM. |
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ddb
Joined: 26 Feb 2007
Posts: 4386
Location: Manhattan
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| Posted: Thu Jan 21, 2010 5:50 pm Post subject: |
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| Random Musings wrote: | | With respect to front-end loads, I would like to add that any ethical advisor who wants to lower the front-end costs to their clients, if applicable, can do so simply by investing in the bond fund (2.5 load or something at high end) and then disburse those dollars out to the other funds. Individuals can do the same. |
Stands to reason, then, that an even MORE ethical advisor could offer the class F shares in a fee-based account and charge a 0% asset management fee.
I don't believe that charging higher or lower prices is an indication of ethics. Rather, full disclosure of costs and answering all questions honestly in an indication of being ethical.
If I say to you: "my fee to prepare your tax return for 2009 is $10,000", am I being unethical?
- DDB
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Random Musings
Joined: 22 Feb 2007
Posts: 2410
Location: Pennsylvania
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| Posted: Thu Jan 21, 2010 6:04 pm Post subject: |
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ddb wrote:
| Quote: | | I don't believe that charging higher or lower prices is not an indication of ethics. Rather, full disclosure of costs and answering all questions honestly in an indication of being ethical. |
Perhaps instead of ethical I should have said more reasonable. However, if an indication of being ethical is full disclosure of costs, should not all the various investing options (such as conduiting through bonds and/or F shares at some reasonable rate) be brought to the table to the client? Or just the ones the seller wants to bring up unless the client asks a question that brings up those other scenarios? I mean, he/she didn't lie when they mentioned a 5.75% front-end load option and a back-end load option.
Call it ethics or honesty or whatever, it still makes sense to shop around if one wants to use an advisor. Costs do matter, as well as the products offered and services (hopefully beneficial) rendered.
RM |
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alec
Joined: 02 Mar 2007
Posts: 1493
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| Posted: Thu Jan 21, 2010 9:15 pm Post subject: Re: Why do financial advisors constantly use American Funds |
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| Flux Capacitor wrote: | | I have heard from many people who use an advisor that they are always placed with A shares of American Funds. Why so popular? Brand name recognition? Is the AF track record that great? |
Because (1) they're brokers, (2) they're trying to maximize the revenue for themselves and [more importantly] the firm they work for, and (3) American funds probably pay a good deal of the commission and 12b-1 fee to the broker.
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Jack
Joined: 27 Feb 2007
Posts: 1550
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| Posted: Fri Jan 22, 2010 12:30 am Post subject: |
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| ddb wrote: | I don't believe that charging higher or lower prices is an indication of ethics. Rather, full disclosure of costs and answering all questions honestly in an indication of being ethical.
If I say to you: "my fee to prepare your tax return for 2009 is $10,000", am I being unethical? |
Disclosure is necessary but not sufficient. That is why the oath in court includes the phrase "the truth and the whole truth."
Any time a person takes advantage of asymmetrical information there is the potential for ethical problems. And a person's ignorance of the right question to ask doesn't mean you get a pass for not bringing it up even if you answered all questions truthfully.
In your example if the customer is illiterate and doesn't know that HR Block will do their taxes for $100, then simple disclosure of your price and their agreement to it doesn't mean that you are ethical. |
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Callalily
Joined: 16 Dec 2009
Posts: 6
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| Posted: Fri Jan 22, 2010 12:47 am Post subject: |
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| My husband and I started off by investing in American Funds. I very quickly learned a great deal and stopped investing in American Funds and started using Vanguard instead. My husband, however, refuses to stop using American Funds because he likes having access to our financial advisor to ask questions. So that's the status quo. It's better than him not investing at all. |
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