American Funds

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daddydub
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American Funds

Post by daddydub » Thu Mar 05, 2009 11:56 am

I saw a note on here yesterday where someone mentioned this company and it's line of funds and said, "Well, I already know you're overpaying."
Are these funds known to be that way?

If you're curious as to why I would ask:

I went to lunch with an old friend last week who now is in the financial planning game working under one of the brand names we all know. I would refer people to him if I thought it were the right situation but I wanted to know more about his recommendations specifically. I asked about what he would recommend specifically for a 529 and for an IRA. Since he just happened to know two good products to recommend and they both happened to be American, I made the decision to never recommend him to anyone.

However, is there more to this than I do not know? I already have friends and even family invested with him and I'm trying to decide if I need to make some calls and recommendations to them, as a trusted confidant.

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Nosferatu
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Post by Nosferatu » Thu Mar 05, 2009 12:25 pm

Most American Funds, if not implemented in a 401k-type structure, have fairly significant front-end loads, meaning you pay a percentage just to get into the American Fund of choice. Then, you'll typically pay a higher yearly fee than funds in Vanguard, for example.

I believe that all American Funds are actively managed.

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Post by tfbandie » Thu Mar 05, 2009 12:31 pm

The general feel I get from these boards is that American Funds is better than most. They do have the front end load, but their ER is moderately low. So while indexing is better, AF is okay. Plus if you invest large amounts they remove the load.

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Post by chaz » Thu Mar 05, 2009 12:32 pm

IMO anyone invested in American should switch to Vanguard.
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Post by daddydub » Thu Mar 05, 2009 12:35 pm

Thank you for the responses.

The conclusion I have made is that while Vanguard is the best low cost alternative out there, it's not for everyone. There are those, like the aforementioned friends and family, that would prefer that someone else do the work for them .

Without knowing exactly what they hold and how much they pay for it, it's impossible for me to give anything but a generic suggestion.

Like I said, the advisor's quick recommendation of this line of funds in both instances leads me to believe there is a large incentive, like a piece of the front end load channeled back to him, that might motivate him to make this suggestion.

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Post by Dagwood » Thu Mar 05, 2009 12:36 pm

American Funds are among the best of the actively managed funds, but as the other person said you pay a front end fee and then an annual load that's higher than Vanguard.

Where I come down on it is this: if you are in the market long-term, which to me is at least 20 years, I've never read or seen anything that shakes my belief in the premise that actively managed fundx beats the indexes in the long run. So why pay more, in taxes and fees, to earn the same or not as much? That's why our money that is not in my work 401K (that's in the TSP) is at Vanguard -- because we are in the market for another 30 years, and I've already been in for almost 10.

If, however, let's say that you need to make a good return within a shorter period of time -- say under 10 years -- then I think there's at least an argument to be made that actively managed funds could be worth the cost. While personally I would never want to have to play catch up because of the risks involved in trying to beat the market while running up fees and taxes, again, I think intellectually the argument is at least reasonable.

So, to answer your question, if I had to be in an actively managed fund, I would be in the American Funds as they are amongst the best actively managed funds out there. But, again, at the outset, I think the average investor is far better off developing the discipline to save early in his or her working life and then allowing simple saving and indexing to do their work most efficiently over a very long period of time (30 to 40 years or more if you can swing it). All of the other "traffic" you see here and on other investing websites about where to invest, how to allocate, etc. are, in my humble opinion, secondary to the most important considerations: developing a discipline to save and getting started early in life.

And as far as your concern about doing "work" there are many "hands off" Vanguard funds that will do the work at minimal cost -- the lifecycle funds, for example, come immediately to mind.
Last edited by Dagwood on Thu Mar 05, 2009 4:47 pm, edited 1 time in total.

Ken Reckers
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Re: American Funds

Post by Ken Reckers » Thu Mar 05, 2009 12:50 pm

daddydub wrote:I already have friends and even family invested with him and I'm trying to decide if I need to make some calls and recommendations to them, as a trusted confidant.
I wouldn’t recommend your old friend to anyone. At the same time, I would not “un-recommend” him to any friends or family who are using him. Let it be.

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Post by bnttwnbnt » Thu Mar 05, 2009 1:04 pm

daddybub wrote:There are those, like the aforementioned friends and family, that would prefer that someone else do the work for them
People like that pay the price for the advisor's work indirectly through the loads.

My experiences with a commissioned advisor won't impress and inspire anyone to do business with one. The advisor would make mistakes on my annual reports saying my ROI was greater than actual. Recommended a taxable account when all I really needed to do was max out my 401k (but that means no commission for the advisor). Would answer my questions in advisor-speak not in terms I understood. Would only want to meet with me to sell other things (like insurance). Would recommend taxable bonds for my taxable account (against the Boglehead tax efficiency).

This was all with American Funds. And yes AF isn't THAT bad with their ERs compared to other active managed funds in the industry but I knew I could do better with Vanguard. So I switched and am happier. I now have an IRA with 4 funds instead of the advisor's AF IRA with about 8! I once had an AF taxable with 6 funds! I don't know if commissioned advisors do that because they are overly paranoid about investing in a few funds or if it's commission-motivated. Whatever it is, I can do with out it.

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Post by White Coat Investor » Thu Mar 05, 2009 1:15 pm

American Funds are the loaded mutual funds with the best past track record. Their ERs are high by Vanguard standards, but reasonable by industry standards.

They are routinely bashed here because they are LOAD funds. I really don't see much difference between someone who uses American funds versus someone who uses Vanguard active funds and pays someone 1% to recommend which ones to use.

Personally, I (like most on this board) prefer no-load funds and paying nobody to give me advice.
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Post by Sammy_M » Thu Mar 05, 2009 1:23 pm

FWIW, I feel pretty okay about using Am. Funds in my 401K. I might as well feel okay about it since I have no other decent options. It's either feel okay and use Am. Funds, or feel lousy about using Am. Funds. End result is the same.
EmergDoc wrote:I really don't see much difference between someone who uses American funds versus someone who uses Vanguard active funds and pays someone 1% to recommend which ones to use.
Or someone who buys an ETF when it is trading at 5% premium to NAV.
Last edited by Sammy_M on Thu Mar 05, 2009 1:26 pm, edited 1 time in total.

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Post by JasonR » Thu Mar 05, 2009 1:23 pm

bnttwnbnt wrote:Would answer my questions in advisor-speak not in terms I understood. Would only want to meet with me to sell other things (like insurance)..
I believe it was W.C. Fields who once said, "Don't wise up a chump."

My (former) AF advisor lived by these words. He had me (and my 65 year-old mother!) in 100% equities as late as June 2007. Wow, I saw the light and moved to Vanguard--and into a decent chunk of bonds/cash--just before the storm hit. He responded by mailing me a huge package of papers, comparing all AF funds to Vanguard's S&P 500 Index fund. That part still makes me chuckle.

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Re: American Funds

Post by normaldude » Thu Mar 05, 2009 1:28 pm

daddydub wrote:I went to lunch with an old friend last week who now is in the financial planning game working under one of the brand names we all know. I would refer people to him if I thought it were the right situation but I wanted to know more about his recommendations specifically. I asked about what he would recommend specifically for a 529 and for an IRA. Since he just happened to know two good products to recommend and they both happened to be American, I made the decision to never recommend him to anyone.
Brokers & financial planners get commissions for selling American Funds.

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NightOwl
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Post by NightOwl » Thu Mar 05, 2009 1:35 pm

My former adviser got me into American Funds in my IRA -- my fault for leaving the decision to him instead of educating myself. 5.75% front load, ERs in the .6% range -- not bad ERs considering the 1.5%+ ERs of the funds he advised me to buy in my taxable account. It's true the front-end load (sales charge) goes down as your balance at AF grows, but it doesn't go away until you hit $1 million. The important number for me, as a new investor, was this: if you invest less than $25,000, the sales charge is 5.75%, and the dealer commission as a percentage of the sales charge is 5%. (All from table of charges found on p. 25 of the American Funds Balanced Fund prospectus, easy to find on the American Funds site). So it's profitable for advisers to pitch American Funds.

I hated the idea that my funds had to grow 6.1% just to get me back to even. I think it was the American Funds purchase that convinced me that I had to handle my own investing in the simplest and least expensive way possible. I should say that I have several family members who are still with advisers and who own American Funds offerings. My dad has been investing with American Funds for years and has reached somewhat lower loads, and he's been fairly happy with their performance. Again, compared with the ERs of some of the other funds I had in my pre-Bogleheads portfolio, the American Funds are decent. But I wouldn't ever buy them again. In fact, instead of rolling those funds to Vanguard as an in-kind transfer, I swallowed the sunk cost and just sold them so that I could buy TSM.

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Post by IL Int Med » Thu Mar 05, 2009 1:53 pm

NightOwl wrote:My former adviser got me into American Funds in my IRA -- my fault for leaving the decision to him instead of educating myself. 5.75% front load, ERs in the .6% range -- not bad ERs considering the 1.5%+ ERs of the funds he advised me to buy in my taxable account. It's true the front-end load (sales charge) goes down as your balance at AF grows, but it doesn't go away until you hit $1 million. The important number for me, as a new investor, was this: if you invest less than $25,000, the sales charge is 5.75%, and the dealer commission as a percentage of the sales charge is 5%. (All from table of charges found on p. 25 of the American Funds Balanced Fund prospectus, easy to find on the American Funds site). So it's profitable for advisers to pitch American Funds.

I hated the idea that my funds had to grow 6.1% just to get me back to even. I think it was the American Funds purchase that convinced me that I had to handle my own investing in the simplest and least expensive way possible. I should say that I have several family members who are still with advisers and who own American Funds offerings. My dad has been investing with American Funds for years and has reached somewhat lower loads, and he's been fairly happy with their performance. Again, compared with the ERs of some of the other funds I had in my pre-Bogleheads portfolio, the American Funds are decent. But I wouldn't ever buy them again. In fact, instead of rolling those funds to Vanguard as an in-kind transfer, I swallowed the sunk cost and just sold them so that I could buy TSM.

NightOwl

My experience is very similar to that of NightOwl's, except I wasn't smart enough to switch until after last year's big crash. I realized that the 5.75% front load was not enough to hire anyone smarter than the index. My investments in AF funds tanked just as much as anyone else's, so why should I pay the difference?

In my job I've had a financial advisers(not one who used to manage my money) admit in an unguarded moment that the 5.75% load is almost entirely used to pay commissions to the adviser and his firm. After reading Bernstein's 4 Pillars chapter about how the adviser can do better than the invester, I took my lumps and put everything into VG instead.

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Post by bnttwnbnt » Thu Mar 05, 2009 2:15 pm

JasonR wrote:My (former) AF advisor lived by these words. He had me (and my 65 year-old mother!) in 100% equities as late as June 2007.
I was also invested in about 100% equities with my AF advisor. Although I'm not retiring for a few decades, the advisor could have given me at least 10% bonds or something.
IL Int Med wrote:After reading Bernstein's 4 Pillars chapter about how the adviser can do better than the invester, I took my lumps and put everything into VG instead.
A good online read is Transparen Investing. This forum along with that literature, made me finalize my decision to ditch AF and the commissioned advisor.

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Post by chaz » Thu Mar 05, 2009 2:48 pm

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Post by Trifecta » Thu Mar 05, 2009 3:53 pm

bnttwnbnt wrote:
daddybub wrote:There are those, like the aforementioned friends and family, that would prefer that someone else do the work for them
People like that pay the price for the advisor's work indirectly through the loads.

My experiences with a commissioned advisor won't impress and inspire anyone to do business with one. The advisor would make mistakes on my annual reports saying my ROI was greater than actual. Recommended a taxable account when all I really needed to do was max out my 401k (but that means no commission for the advisor). Would answer my questions in advisor-speak not in terms I understood. Would only want to meet with me to sell other things (like insurance). Would recommend taxable bonds for my taxable account (against the Boglehead tax efficiency).

This was all with American Funds. And yes AF isn't THAT bad with their ERs compared to other active managed funds in the industry but I knew I could do better with Vanguard. So I switched and am happier. I now have an IRA with 4 funds instead of the advisor's AF IRA with about 8! I once had an AF taxable with 6 funds! I don't know if commissioned advisors do that because they are overly paranoid about investing in a few funds or if it's commission-motivated. Whatever it is, I can do with out it.
The advisor has to have more funds because if it seems too simple then you would have seen even earlier that you could do it yourself. It is the illusion of necessary complexity that keeps more people from managing their own investments.
"It is difficult to get a man to understand something when his job depends on not understanding it." - Upton Sinclair

daddydub
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Post by daddydub » Thu Mar 05, 2009 3:55 pm

Thanks again to everyone for the input and advice.

It's clear to me now that AF is prevalent and likely part of a standard sales recommendation by all brokers that work for this particular "chain" of shops.

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Post by freedomfunds » Thu Mar 05, 2009 6:54 pm

American Funds returns and practices are respectable.

Some people want active funds.

If I were asked what were the best active companies. I would say

1. American.
2. DFA
3. Blackrock
Index choice matters. | | Valuations matter even more.

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Post by taxman » Thu Mar 05, 2009 8:47 pm

chaz wrote:IMO anyone invested in American should switch to Vanguard.
X2 :? there brokers are salesmen period looking to get you in the 'fold'JMO

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Post by GG » Thu Mar 05, 2009 11:31 pm

The biggest lie on this or other boards over the last several years is that Af are "not bad considering the alternatives". IMO, this is a joke.

When you run analytics on the funds the risk adjusted returns are not good deals - even if they're load waived. And that risk has shown up in the last 6 months BIG time. It will be tough to tout AF performance after recent history has revealed the risk levels. Just pull a few funds and compare to benchmarks and look at the MPT stats. There's no free lunch. Bad deal all around

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Post by GG » Thu Mar 05, 2009 11:34 pm

PS

If you had to sell a product where you get paid, this *was* an easy one to sell - so use it. But that's what it was. And easy sell. No majic management here.

If i could post a video of the AF wholesaler who visited my office in the 90s, you guys woudl flip
Last edited by GG on Fri Mar 06, 2009 9:12 am, edited 1 time in total.

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Post by GG » Thu Mar 05, 2009 11:35 pm

freedomfunds wrote:American Funds returns and practices are respectable.

Some people want active funds.

If I were asked what were the best active companies. I would say

1. American.
2. DFA
3. Blackrock
Are you kidding me? Post some performance numbers and then repeat that quote

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In my..

Post by Trev H » Fri Mar 06, 2009 7:14 am

In my wonderful company plan the AF Growth Fund of America is available (with no load) and the ER is less than the 500 index fund available there.

I split my US Large Cap allocation equally between the two.

If you can get in them without the load, not a bad deal.

If I had to pay the load - NO WAY !

Trev H

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Post by freedomfunds » Fri Mar 06, 2009 7:44 am

DDB has this wonderful tool where you can search all the returns for a fund company for 15 years and find the rank in the category for each of the funds of that company. If you want the data you can ask him. I already asked it for Vanguard so it would be rude for me to ask for something again.

He can use it for you to get complete data, but from my own looking I recall the three groups I mentioned did quite well.
Index choice matters. | | Valuations matter even more.

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Post by AnneT » Sun Mar 08, 2009 10:36 pm

I don't want to hijack daddydub's thread but since this is on the first page I feel silly starting a new one.

I just got the materials for the SEP plan for the small non-profit where I work (I'm 26, first job out of university). All the funds offered have loads and the loads are about equal. The fund companies on offer are:

Natixis, MFS Fundfacts, Invesco Aim, and American Funds.

My goal for this year is to fully fund an IRA through Vanguard so I've been reading a lot about index funds. With that knowledge in hand, it looks like American Funds are the best of a very pricey lot. From what I've read in this thread does that seem to hold true? If indexing is not an option within a company plan, is it ok to just pick the funds with the lowest expense ratios that generally meet my portfolio goals?

I should also add that none of my own money is being invested this way. My organization simply contributes a fixed amount of your salary each year to the SEP plan. I can't add anything on top of that even if I wanted to. All of the investing with my own money I plan to do through Vanguard as soon as my emergency fund is a little better funded.

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Post by Ping Pong » Sun Mar 08, 2009 11:49 pm

EmergDoc wrote: I really don't see much difference between someone who uses American funds versus someone who uses Vanguard active funds and pays someone 1% to recommend which ones to use.
There's a HUGE difference. With a load fund, the advisor has an incentive to get you to switch to a new fund family every 10 years or so to get a new commission. After the dot com bust, tons of advisors switched their clients over from whatever load fund they were in to American Funds, collecting another load commission. At some point, there will be another reason to switch again, and again.

I think there's a HUGE conflict of interest in paying an advisor via loads.

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Post by NightOwl » Sun Mar 08, 2009 11:49 pm

Hi Anne,

Welcome! I'm new to the forum myself, but I'll go out on a limb and say that I think you should post a new thread in the "Investing -- Help with Personal Investments" category. You'll get great portfolio advice, as I did, if you post in the format suggested here:

http://www.bogleheads.org/forum/viewtopic.php?t=6212

If you list funds/loads/ERs, etc., the gurus here will help you out. You might also read the Investment Planning page that is linked at the top of that page.

This forum is full of people willing and able to help you, but do post a separate thread.

NightOwl

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Post by cheapskate » Sun Mar 08, 2009 11:58 pm

While American Funds are among the better active choices out there, given the size of their funds, I have a hard time believing their funds are not closet index funds, tracking the markets very closely. So in effect, you are losing the front end load and the ER differential, as well as any frictional trading costs and tax drag.

Given this, why bother with AF ? Unless you are locked into a 401K where you don't have Vanguard as an alternative ?

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Post by funnymoney » Mon Mar 09, 2009 12:38 am

While I wouldn't invest in American Funds for the obvious reasons, there are many people who prefer to pay for services rather than do their own work. Landscape maintenance guys, housecleaners, and handymen are all grateful. If relatives and friends are not interested in doing their own work, AF are not a bad alternative.

I would be willing to bet that a high percentage of Vanguard types mow their own lawns and otherwise engage in DIY activities! I find it discouraging, but nowadays, most people prefer to farm out work they could easily accomplish. Which brings me to a favorite life premise: "Never try to teach a pig to sing. It wastes your time and annoys the pig."

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Post by Dagwood » Mon Mar 09, 2009 9:16 am

funnymoney wrote:While I wouldn't invest in American Funds for the obvious reasons, there are many people who prefer to pay for services rather than do their own work. Landscape maintenance guys, housecleaners, and handymen are all grateful. If relatives and friends are not interested in doing their own work, AF are not a bad alternative.

I would be willing to bet that a high percentage of Vanguard types mow their own lawns and otherwise engage in DIY activities! I find it discouraging, but nowadays, most people prefer to farm out work they could easily accomplish. Which brings me to a favorite life premise: "Never try to teach a pig to sing. It wastes your time and annoys the pig."

Funnymoney
While I agree with you in terms of investing philosophy, I think your bigger analogy to other services is flawed, to say the least, and has nothing to do with investing.

People invest with Vanguard because they understand the simple premise that if you are in the markets long-term, it is difficult if not impossible to consistently beat the market, and even if you do, the costs of doing so, in taxes and loads / fees, often make it not worthwhile. People who do not typically aren't "lazy", they are simply intimidated because there is a multi-gazillion dollar financial industry that wants you to believe that it is complicated, when it is not, as most of us here know. And it probably takes only a few hours of work a year to manage an average portfolio. Most of us here spend more time thinking about it, but I would venture to say that's because we enjoy finance, it doesn't represent a true need, in terms of time spent. In fact, I would argue, spending too much time on your portfolio can cause you to become too focused with the short-term and become distracted by passing events.

By comparison, paying for services around the house, at least for me, reflects a recognition that my free time on the weekends -- time that I am not at the office -- has a very high value, especially when these things often take a great deal of time, every week, week in and week out. So, rather than bagging grass clippings and cleaning toilets on Saturday, I can spend some time with my family doing something more interesting to me, such as going to the park or a museum.

At the end of the day, there isn't a "right" answer when it comes to these things, it's a question of how much relative value you receive from paying people to do certain time-consuming things. I am always amused when people refuse to pay for any help whatsoever; either they have no money or, more likely on a forum dedicated to investing / finance, they place zero value on their own time. I place a value on mine, and managing investments with the Boglehead philosophy is a very economical way, in terms of time and money, to proceed. When that's the case, it's a no-brainer to do it yourself. When it is something that can absorb the whole weekend, every or most weekends, I'll find someone else to do it and happily pay them a fair amount. This doesn't make me, or others like me, pigs. It represents a recognition that while it is important to be financially prudent, there is also more to life than finance, and an essential prerequisite to being able to enjoy life is to have some free time with which to do so.

Raymond Lombardo

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Post by bnttwnbnt » Mon Mar 09, 2009 11:00 am

raymondalombardo wrote:At the end of the day, there isn't a "right" answer when it comes to these things, it's a question of how much relative value you receive from paying people to do certain time-consuming things. I am always amused when people refuse to pay for any help whatsoever; either they have no money or, more likely on a forum dedicated to investing / finance, they place zero value on their own time. I place a value on mine, and managing investments with the Boglehead philosophy is a very economical way, in terms of time and money, to proceed. When that's the case, it's a no-brainer to do it yourself. When it is something that can absorb the whole weekend, every or most weekends, I'll find someone else to do it and happily pay them a fair amount. This doesn't make me, or others like me, pigs. It represents a recognition that while it is important to be financially prudent, there is also more to life than finance, and an essential prerequisite to being able to enjoy life is to have some free time with which to do so.
Good clarification. It just so happens that I started years ago with AF and didnt mind that I would have to pay my dues to my financial advisor (indirectly throught loads and such). In retrospect though, I didn't see any value in paying the advisor indirectly as the advisor actually wasn't very helpful. And let's face it, he didn't know any better on where the market was going to go than I did (no matter all the abbreviations at the end of his name). So I felt that I was invested in loaded funds with an advisor that wasn't even worth the extra money I was paying. When I found Bogleheads, I gladly switched to Vanguard. Since switching, I also now do my own taxes, and will also try to start chaning my own oil in my car. Thing is, I am single with no kids yet so I have the time. When I am married with kids, then Ray's points could hold true for me as well. But I will never need the services of a financial advisor for my retirement portfolio, that is for sure!

Sometimes if you want it done right, you really do have to do it yourself.

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Re: American Funds

Post by jeffyscott » Tue Mar 10, 2009 9:50 am

daddydub wrote: Since he just happened to know two good products to recommend and they both happened to be American, I made the decision to never recommend him to anyone.
I'd see his recomendation of American Funds as a reason to consider him okay, in our imperfect world. Yes, you have to pay a load, but if someone has, say, $50,000 to invest, they are not going to find a fee-based advisor to work with them for even 1% per year. Even Rick Ferri has a $2000 per year minimum:

http://psinvest.com/administration.html

So the choice of American, with a one time load or a 1% per year load may well be a better option for those who want someone else to tell them what to do. At least the funds have fairly reasonable ERs after the load is paid and low turnover, unlike the "Lutheran" funds that my wife's parents use.

Most things I have read indicate that, if one "must" use load funds, American is probably the best option. So that fact that the load-based advisor chooses American, would be a positive, IMO. You can read some m* articles about American Funds here:

http://www.morningstar.com/FundFamily/A ... Funds.html
press on, regardless - John C. Bogle

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Post by Random Musings » Tue Mar 10, 2009 10:57 am

With respect to American Funds - I don't believe the funds are truly a major problem. If conduit through bond fund and/or have enough purchasing power to avoid load, the ER's are not bad.

The biggest risk in using American funds would be if one utilizes an advisor who doesn't give proper advice - giving advice to his/her client that doesn't fit the risk needs/goals of the client.

No different than individual investors who don't follow a proper plan.

Which more or less comes down to a) educate yourself with respect to investing and follow your plan or b) find a low-cost ethical advisor who understands what they are doing.

RM

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