Today, Richard Oring of New Century Financial Group joins Jon Gay to explain the various fees associated with mutual funds.
We cover:
Resources:
Email Richard: ROring@ncfg.com
New Century Financial Group Website
Call Richard: 609-924-2049 x126
Today, Richard Oring of New Century Financial Group joins Jon Gay to explain the various fees associated with mutual funds.
We cover:
Resources:
Email Richard: ROring@ncfg.com
New Century Financial Group Website
Call Richard: 609-924-2049 x126
Jon Jag Gay:
Welcome back to Financial Matters with Richard Oring. I am Jon Jag Gay. Rich, great to be back with you.
Richard Oring:
Jag, I think it's been since August since we recorded our last podcast, and that's all my fault.
Jon Jag Gay:
That's all right. It looks like you've been renovating the entire office there. I'm looking at your surroundings, it looks nice.
Richard Oring:
We started this right after Labor Day in September.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
And literally last Monday, so that would've been a couple days ago, we've got the floors finally done. So I got to office set up. The whole office is about 95% done, little fixes here or there. But I got to tell you, I've been working in about a four foot area on a tabletop in my office in the conference room. And after a couple weeks of that, it's hard, it's depressing. All your files, all your stuff you're working on you put on hold is in a box.
Richard Oring:
I got to tell you, Wednesday I came home from work and my wife goes, "How was today?" I'm like, "It was awesome, I loved working today." I was finally back at my desk, I felt comfortable again.
Jon Jag Gay:
Something as little as just cleaning off the top of your desk and getting everything organized can make for such a better mindset wen you're working, so I can't even imagine doing the entire office.
Richard Oring:
Well when you do the whole office you go through all those files you just hide places.
Jon Jag Gay:
Yes.
Richard Oring:
That you don't know what to do with, and then you finally give it to someone to scan or destroy.
Jon Jag Gay:
Yes, exactly.
Richard Oring:
So I don't have a lot of junk anymore.
Jon Jag Gay:
Not quite as fun as finding a 20 dollar bill in your winter coat the first time you put it on for the year.
Richard Oring:
So I'm not the only one who looks forward to putting winter coats on? Look at this, I found some change, maybe an old USB key with some songs on it.
Jon Jag Gay:
Exactly. Well Rich it's been a minute, and today we're going to get back into the financial world. We're going to talk about mutual funds. For me, I know I've got a retirement account from when I had employers and there's mutual funds and targeted funds for when I'm going to retire and that stuff. But beyond the basic idea that a tone of different funds go into a mutual fund by definition, I really don't know a lot about it, so where do you want to start today?
Richard Oring:
For this episode, I'm not going to break down about mutual funds.
Jon Jag Gay:
Okay.
Richard Oring:
I think the most important thing, what I want to accomplish today during this episode, is to really break down and understanding what you're paying for.
Jon Jag Gay:
Okay.
Richard Oring:
Nothing's free.
Jon Jag Gay:
Right.
Richard Oring:
And with mutual funds it's not like they send you a bill; you don't even see it coming out of your account.
Jon Jag Gay:
Right.
Richard Oring:
But you should know what you're paying for and how to find those costs.
Jon Jag Gay:
All right. So where do we start?
Richard Oring:
Why don't we break down this episode in a few sections.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
Let's talk about the resources where you can find these costs, and also the performance.
Jon Jag Gay:
Yeah, you want to know how you're doing.
Richard Oring:
Some definitions. We always throw definitions in every podcast we do.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
So I'm paying for something, am I getting my value for it? Just because I show you where the resources are and the definitions, you've got to still know how to analyze that data.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
And it's not difficult. And those who are using an investment advisor, after this podcast I'm hoping over the weekend you're going to take time to look at your own portfolios and start writing notes and seeing if the funds are good and going back to your broker. And you should be equipped to be able to ask questions.
Jon Jag Gay:
All right, so you said we're going to start with resources, Rich. What are some of the resources out there that investors can look at to get some of this information?
Richard Oring:
Sure. I think my favorite one is investor.gov. This is a website our government has given us where you can do your own research. It has educational pieces in there, it has sections where you can check on broker history, on how long we've been in business, what licenses we have, any complaints, things like that. But they have a section called financial tools, and there's something where you can put a mutual fund ticker symbol and, again, every mutual fund has a four character-
Jon Jag Gay:
Abbreviation symbol.
Richard Oring:
Four character symbol. I'm using my fingers just to make sure it's four. Symbol where you can research on that fund. You just put the ticker symbol in or you can type the mutual fund in, and boom comes up this screen. Beautiful, it shows the expense ratios, shows you where it fits in with the expenses compared to its category, shows performance, it gives you a lot of information.
Jon Jag Gay:
All right, so investor.gov is that website. And of course we're going to include all these resources in our show notes as well. Where else can people look?
Richard Oring:
Okay, so morningstar.com.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
Now, all this data which goes to investor.gov or other websites, Morningstar is the largest data provider for investments.
Jon Jag Gay:
Okay.
Richard Oring:
So a lot of companies buy their data from Morningstar, but Morningstar also has their own website. You can go type in a mutual fund ticker symbol and get that information.
Jon Jag Gay:
So those are two industry websites, investor.gov and morningstar.com. Where else can people go?
Richard Oring:
I kind of like investor.gov over the Morningstar because it's designed for the consumer, where Morningstar might have a little bit more technical information.
Jon Jag Gay:
Okay.
Richard Oring:
Then a lot of people I know track their portfolios on MSN Money or Yahoo! Finance.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
There's companies like [Investotopia 00:05:28] I think even offer some tools. If you're in a 401(k) plan, a lot of the 401(k) plans offer online access. Within the online access, they usually give you investment information on the mutual funds. A lot of time, again this is coming from Morningstar.
Jon Jag Gay:
Okay.
Richard Oring:
There's probably many other places you can gather data from, but those are probably the biggest ones out there.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
The most important, though, which I didn't mention, I wanted it to be last because I didn't want it just to get washed over, is every mutual fund has a prospectus.
Jon Jag Gay:
Okay.
Richard Oring:
The prospectus is a document which details everything. It details investment objectives, the strategy, it has a lot more finer points like past performance. What's their distribution policy paying out on capital gains and dividends? Who's the fund manager? What's the management team like? How long they've been there before. A lot of times it'll show you their education, past work experience, what's the risk in investing in the fund? And then most important because we're talking about this in this episode, it shows the fees and the expenses within the mutual fund.
Jon Jag Gay:
It's funny you mention the prospectus, Rich, because I think previously I would get all these packets in the mail and be like I don't have time to deal with this, and I would throw it away or file it somewhere. And now I switched to online and I'll get a couple emails every month of this is what's going on with this mutual fund. I never read them, and I think most people don't. But it's really important and I'm so glad you brought it up, because the prospectus has so much information that you can really learn just by looking through it.
Richard Oring:
Right. So in the prospectus, you're not any different than anyone else. Most people who are investors, shareholders, aren't reading the prospectus.
Jon Jag Gay:
Yeah.
Richard Oring:
As an investment advisor, I'm obligated to read that prospectus and understand what's going on with that fund and how it's working. A lot of it's common, I'm just looking for differences or the numbers.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
But as an investment advisor, we're supposed to understand what we're selling.
Jon Jag Gay:
Sure.
Richard Oring:
That information is in the prospectus as part of our due diligence. Saying that, a lot of the information in the prospectus is being fed to companies like Morningstar.
Jon Jag Gay:
Right.
Richard Oring:
So the Morningstar is almost, part of it is like CliffsNotes on the prospectus.
Jon Jag Gay:
Ah, the high school me loves CliffsNotes. I remember those days.
Richard Oring:
But the prospectus is a legal file document which is available. Technically you're supposed to have it every time you sell a mutual fund. That's why they send you the emails.
Jon Jag Gay:
Yeah.
Richard Oring:
And it has all the details. When I first got in the business, and we're going to talk about share classes later, but I had a client who passed away who owned a mutual fund. And the funding company wanted to charge a backend surrender charge to liquidate that fund.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
And something didn't seem right to me on that.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
So I remember reading in the prospectus that if someone died with a B-share, the redemption charge was waived.
Jon Jag Gay:
Ah.
Richard Oring:
So I called the fund company, we went through the prospectus, and I showed them.
Jon Jag Gay:
So in this prospectus, Rich, there are a lot of definitions and a lot of words that I think if you don't know what you're looking for, like you as a professional, it can get a little confusing. What are some of the terms to look for, whether it's on a website or on a prospectus, and what are some of their definitions that we can get a better grasp on this?
Richard Oring:
Sure, I think that's important to understand. A lot of these terms I'm going to use, if I slip and call it something else I'll try to correct myself. Sometimes there's multiple terms for one thing. And sometimes as an investment advisor we might be stuck using it in a different way, like a different term, whereas consumers who read mutual fund magazines and stuff might be calling it something else. We understand what it is, though, when you talk to us.
Jon Jag Gay:
Okay, got it.
Richard Oring:
All right, perfect. So let's talk about the load. Load is upfront back-end commissions.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
This is how investment advisors get paid.
Jon Jag Gay:
All right.
Richard Oring:
Okay. So a lot of times we see an A-share. Mutual funds have share classes. You'll see the name, and then sometimes you'll see A, B, C, F, N.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
It's like an alphabet [inaudible 00:09:45]. If you don't see any share class, that's usually what we call a no load. And I'll catch that in a second.
Richard Oring:
So a front end load means that you're paying a commission at the time of the purchase. So if the commission is... You can see them as high as 5.75%. That's average. On a 5.75% commission, as soon as you invest that money, they're taking that right out.
Jon Jag Gay:
So what you're saying is, saying 5.75% as an example here. So say round numbers, you invested $100 in this mutual fund. $5.75 of that goes to the advisor and then the remaining $94.25 goes into the investment, correct?
Richard Oring:
Correct. Out of fairness, it doesn't go 100% to the advisor, it goes to... It's the gross dealer concession we call that, and it goes to usually the broker, and then we might get a part of it. Common is we get 5% credited to us of that 5%.
Jon Jag Gay:
Okay, but bottom line is that commission comes out of your investment and goes to the other people involved. And then what's remaining goes into that investment?
Richard Oring:
Correct. When you pay an upfront commission, the internal fees we're going to talk about are usually lower.
Jon Jag Gay:
Right, because you're paying more on the front end, got it.
Richard Oring:
Correct. So for long term investing, someone wants to pay a commission up front, they don't want to pay management fees, that's usually the ideal situation.
Jon Jag Gay:
You're paying it upfront as opposed to later as the money grows?
Richard Oring:
Correct. And usually the more money you give with the fund company, they start lowering the commission. They're called break points.
Jon Jag Gay:
Okay.
Richard Oring:
Or if you know that you're going to open the mutual fund with 10,000 today, but you know that you're getting a big check in a few months, it's going to be another 100,000, you can even sign a letter of intent to get the discount right away knowing more money's coming in the future.
Jon Jag Gay:
So it's almost like any kind of goods or service where if you're going to be spending a lot of money with somebody they'll give you a break on some stuff because you're doing the volume of business. Got it, okay.
Richard Oring:
Exactly.
Jon Jag Gay:
A little bit of back-end load, Rich.
Richard Oring:
So back-end load was really, really common when I first got in the business. There used to be something called a B-share.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
A B-share, you would sell it to the client, they give you the $100 and they have $100 working for them right away.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
The internal expenses would be a little bit higher than in an A-share. The B-share would convert to an A-share after the seventh year.
Jon Jag Gay:
Okay.
Richard Oring:
But if you sold the B-share within the first six years usually, there would be a back-end surrender charge. So maybe the first year if you were to sell it, it'd be like a 4% or 5% back-end strategy, and then it would start going down. Now, today you see back-end charges in a little bit different way.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
Some advisors use C-shares which have a higher internal expense than an A and B. You usually pay nothing up front, but a lot of the fund companies are making you hold it for a year because they pay the investment advisor up front usually about 1% on average.
Jon Jag Gay:
Okay.
Richard Oring:
Not all of them, but on average. So they need to recoup their cost by having a surrender charge if you sell within the first year. Some are three months, some are six months. They're all different. Again, you should know what that is. We talked about REG BI, I think, once before, big changes what happened earlier this year. A lot of the fund companies are now saying if you buy a C-share, they're going to convert them to an A-share after so many years. A C-share, the intention was usually for short term investing. Unfortunately, there are advisors out there who were keeping C-shares as long term investments and the regulatories are looking down upon that, so the fund companies are now, a lot of them are making the C-shares convert to an A-share, just how the B-share used to work.
Jon Jag Gay:
All right, so you've talked about the front-end load where that commission gets paid on the front side, the back-end load where it gets paid on the backside. What about the no load category?
Richard Oring:
So no load, we know companies like Vanguard, Fidelity, these are companies where they don't charge anything up front. Normally there's not a redemption charge, but recently a lot of these even no load companies might say, "Hey, if you buy the fund and you sell it within the first three months, there could be a back-end surrender charge."
Jon Jag Gay:
Okay.
Richard Oring:
The other place we see no load funds are, is in managed accounts.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
It's not really a no load fund. In a managed account, everything's wrapped in a management fee; there's no commissions.
Jon Jag Gay:
Right.
Richard Oring:
So a lot of the fund companies have special share classes where they have no up front costs, and the internal fees are lower because in a managed account we have to act as a fiduciary and do what's in the best interest for the client.
Jon Jag Gay:
Right.
Richard Oring:
So they try to be more competitive with the true no load companies, like the Vanguard and the Fidelity and things like that. But again, even in a managed account, the advisor needs to know if there's a early redemption fee still. So sometimes they still make you hold it for three months, otherwise they can ding you for like half a percent or a percent.
Jon Jag Gay:
Okay, got it. So within a mutual fund there are other fees, and these are the annual operating expenses. Let's break that down.
Richard Oring:
Okay, so these are the fees you don't see.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
When you buy a mutual fund with an A-share, you put $100 in and you don't have $100 worth, you know you're paying for something.
Jon Jag Gay:
Right.
Richard Oring:
All right? So a mutual fund, your return is that net of the expenses.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
All their expenses are bundled in. I would say it's bounded into the performance, because you don't see it.
Jon Jag Gay:
Okay.
Richard Oring:
So all these fees, we're talking about they could be summed up as the annual operating expense. So let's start off. The manager and his team has to get paid.
Jon Jag Gay:
Sure.
Richard Oring:
These are called the management fees.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
It's usually the largest. The next one I love. It's the distribution fee or we call it the 12B-1 fee. This fee covers the cost for marketing and for distribution. So on an A-share, on a commission account, not fee based, a lot of times the advisor who sold you the mutual fund gets an annual percentage paid to them. Besides the upfront fee, they might also be getting about a quarter percent trail to them, we call that.
Jon Jag Gay:
Okay.
Richard Oring:
Then there's the other category: other. Everything has other.
Jon Jag Gay:
Right.
Richard Oring:
Other expenses are going to cover their legal and their accounting and things like that. Again, when you take all three of these fees and you combine them, we call that the annual operating expense, and we represent that in the percentage.
Jon Jag Gay:
Okay, so that makes up the percentage for the annual operating expense, but there are other fees that you might not know you're paying for, right?
Richard Oring:
I can name a whole bunch of them. I'm just going to name common ones. An exchange fee. So normally when you're buying mutual funds directly with a mutual fund company, meaning you go to Vanguard and you buy it on their platform, the statements are coming from Vanguard, usually exchanges there's no cost. If you're going to a brokerage firm, some of the firms might charge you five dollars to do the transfer.
Jon Jag Gay:
Okay.
Richard Oring:
So it's important to understand what an exchange is. Let's just say I own a fictitious mutual fund in an A-share, so I paid 5.75% up front. I have it in my IRA, I've owned it for five years. And because I'm getting older my risk is changing, I want to change that fund.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
Usually what an exchange is, I go from that fund within that fund family to another fund, the same share class within the same fund family and not have to pay that up front commission again.
Jon Jag Gay:
Okay.
Richard Oring:
And again, with a B-share, I don't even know if there's even around, usually you can exchange and the time of holding carries over to the new B-share. So the first miscellaneous fee you should know, you're going to find exchange fee mostly in brokerage accounts.
Jon Jag Gay:
Okay.
Richard Oring:
Then you have ticket charges, same thing. If you go to Vanguard or Fidelity to buy their funds, usually they don't have a ticket charge. In a brokerage account, you might have like a $9, $25 fee to buy or sell a mutual fund. Again, you would find that in brokerage, not managed account. These are commission accounts. I call brokerage commission accounts.
Jon Jag Gay:
Okay.
Richard Oring:
I know other firms call managed and brokerage the same, but when I'm saying brokerage on this podcast, I'm talking about a commission paying an account.
Jon Jag Gay:
Got it.
Richard Oring:
Custodian fees. These are fees usually to cover qualified accounts, IRAs and things like that, for the report to the IRS. You always need a custodian on these accounts, and a lot of times companies charge as little as $10. I've seen companies charge up even $150 per year for an account.
Jon Jag Gay:
So Rich when you add all this stuff up, if I have an account, mutual funds, and if all these fees are true, I could pay, from what I understand, as much as $1,250 a year on $100,000 in investments, right?
Richard Oring:
That's absolutely true. It could be higher, it could be even lower. But on average, that would be about right.
Jon Jag Gay:
So that's about 1.25% if my math is right.
Richard Oring:
Yeah, over the years the mutual fund costs actually have gone down internal. The expense ratio used to be a lot higher. You'll see expense ratios usually higher in international funds because to do the research, to put feet in those countries, to do interviews and things like that. Or they bind their research, so usually international might have higher expense ratio. Bonds will have lower. But the good thing is, the internal cost has gone much lower in the mutual fund over the years.
Jon Jag Gay:
Okay.
Richard Oring:
So yeah you're paying for something, nothing's free. You work, you get paid, I get paid. But the question is, is the value what we're paying for worth it?
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
As we said, every single mutual fund has internal operating costs, or even an up front load. So why is it one fund more expensive than another? That really is a hard question to answer unless you roll up your sleeves and you do some research.
Jon Jag Gay:
Yeah.
Richard Oring:
On this podcast we don't have enough time to start talking about building a diversified portfolio, so why don't we just focus on if we had to buy one mutual fund in one category, and let's choose domestic large cap growth.
Jon Jag Gay:
Okay.
Richard Oring:
First thing you need to do for your research is make sure you're comparing apples to apples.
Jon Jag Gay:
Huge, yeah.
Richard Oring:
I wouldn't want to be comparing a large cap growth fund to a large cap value fund.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
So you want to make sure that they're two large cap growth fund companies. And you want to make sure there's nothing special about it.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
Some large cap might say, "We're lower in risk and this is the reason why." So I may not always expect them to do as well as a typical growth company invested in the FANGs: Facebook, Apple, Netflix, Google, all that fun stuff.
Jon Jag Gay:
Right.
Richard Oring:
You have to make sure that you're comparing apples to apples, make sure you're comparing the same share classes too. So Jag, when we're looking at the funds, I mentioned earlier they have to be similar categories. There's a big thing you need to look at in a category. Is the manager passive or tactical?
Jon Jag Gay:
Okay.
Richard Oring:
Passive means kind of like buy and hold. A lot of times they're going to mirror an index.
Jon Jag Gay:
Kind of hang back, play it safe.
Richard Oring:
Yeah, so we're looking at large cap domestic growth. And I see a manager who's passive, I'm going to be looking to see how they do maybe compared to the Russell 1000 growth.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
They should be doing something similar to them. If they're hitting it out of the ballpark and they're trying to mirror index, that concerns me. If they're underperforming greatly, that would concern me too.
Jon Jag Gay:
Sure, yeah.
Richard Oring:
I would expect them to be similar to the index and I would also expect the cost to be much lower. On a tactical mutual fund, those are managers who aren't trying to mirror an index. They're not trying to mirror the Russell 1000 growth in this instance. They're trying to add some value in their investment for their mutual fund. So they're doing their research, they're trying to figure out what companies to buy, when to sell them. They're more tactical. I would expect the cost in those funds to be higher than the passive.
Jon Jag Gay:
Because they're actually putting more work and they're being more strategic about it and active.
Richard Oring:
Correct. So once you did all that research, the next thing you got to do is see how they did.
Jon Jag Gay:
Yeah.
Richard Oring:
Are they underperforming or over performing or just doing the same as their peers? You can run these reports, you can see there's a thousand mutual funds in hypothetically large cap growth. And they'll rank them. They'll say they're 5 out of 100. So five means they're in the top five percentile.
Jon Jag Gay:
Sure.
Richard Oring:
So that's an easy way to look at it. Within Morningstar I can actually look back each year how they ranked. I can see plus or minus how they did against their peer category, and I can also see how they did against maybe the S&P 500, a broader index.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
So that's a great way to compare performance. With performance, though, there's risk. If you have your home run hitter coming up to the plate, you know that the chances are if they make contact there's a good chance it's going to go out the ballpark.
Jon Jag Gay:
Sure.
Richard Oring:
But you also know that big hitters have a bigger chance of striking out, too.
Jon Jag Gay:
Exactly.
Richard Oring:
They're not your RBI hitters. So the more risk you take, the greater chance of making big gains, but also greater chances of losing money.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
I remember I was at a conference, this had to be like 15 years ago, up in Boston visiting Putnam Investments. And that was the time when the Attorney General was going after and Putnam was in the news about their fees and all that kind of fun stuff. And their new CEO said at the time, I'm going to use Morningstar because this is what he said. Morningstar uses a star rating, one to five, five being the best.
Jon Jag Gay:
Yeah.
Richard Oring:
So that rating gets broken down, weighted, not exactly but it's about 50% comes from the 10 year number, and then 25 and 25 from the five and the three year number. It's not exact, it's close. So he said, "Putnam going forward," and I don't know if it's the same right now, but back then, "Going forward's goal is to become a three star fund consistently, year after year. Because if we're a three star fund consistently year after year, we naturally will become a four or five star fund because we're going to take the risk off the table."
Jon Jag Gay:
Interesting, okay.
Richard Oring:
So Jag. Okay we talked about risk. How about how we measure it? I'm going to assume the average investor has no clue.
Jon Jag Gay:
Yeah.
Richard Oring:
If you're an investment advisor you better. So there's different ways to measure risk, but the most common one is called beta, or the beta coefficient. If you're using Morningstar or most of the websites, they just use the word beta.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
You want to make sure you're using the right beta to use, though. A lot of times they'll use the S&P 500 as a comparison, but if you look carefully, you can find a beta in this same category of the investment you're looking to use. So if I'm using the Russell 1000 growth as my benchmark, the Russell 100 growth beta will always be one.
Jon Jag Gay:
That's your baseline, that's where you're starting. Got it.
Richard Oring:
That's my baseline, exactly. So if my investment is lower than one, means it's less volatile. And anything greater than one means it's more volatile. So in an ideal world, what you want is low beta, high performance.
Jon Jag Gay:
Your beta below one is less volatile, your beta greater than one is more volatile. Got it, okay.
Richard Oring:
Exactly. So not to bore you, there's other terms like alpha and stuff like that which we can talk about in another-
Jon Jag Gay:
We'll do the Greek alphabet in our next podcast.
Richard Oring:
I know, it's crazy.
Jon Jag Gay:
And names of storms after while we're at it, too.
Richard Oring:
And other people use different indicators to measure these things, too. Beta is common, alpha is common, r-squared is common. That's for another conversation, but to measure risk, understand beta, one, make sure you're measuring it against the same category as your investment, same index. Below one, less volatile, greater than one, more volatile.
Jon Jag Gay:
Got it.
Richard Oring:
Ideal world, low beta, better returns than the index.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
That means the manager is adding value.
Jon Jag Gay:
Yes.
Richard Oring:
So Jag, let's talk about turnover. This is really important, especially in taxable accounts.
Jon Jag Gay:
Okay.
Richard Oring:
a mutual fund turnover is the value of all transactions. That's buying and selling, then we divide them by two, then we do another division into the fund's total holding. And if that fund has a turnover of 100% over the 12 months, that means they replaced all the holdings.
Jon Jag Gay:
Everything in that mutual fund. Got it, okay.
Richard Oring:
So what does that mean? Okay, so they bought and sold. Great, we made money, hopefully. Maybe we didn't. You've got to remember, that company might've bought X, Y, Z fictitious stock five years ago. You got in the fund today, they sell it tomorrow, you might've lost money but you're going to get hit with capital gain tax because the fund itself made money.
Jon Jag Gay:
Got it.
Richard Oring:
So you've got to be concerned about capital gain tax for the taxable accounts. The other thing is, normally more buying and selling equals higher transactions costs.
Jon Jag Gay:
Okay.
Richard Oring:
Not for commissions, but the internal operating expense within that fund.
Jon Jag Gay:
You teased us at the beginning, so I want to come back to it. Now that we have a better understanding of a lot of this terminology and how these mutual funds work under the hood, so to speak, when you're evaluating what you have, what are some questions you should be asking your broker?
Richard Oring:
First off, don't be afraid to ask questions to your broker.
Jon Jag Gay:
Right.
Richard Oring:
Even if you don't ask them correctly and you think you're going to make a fool out of yourself, it's your money, you're paying for something, and you should understand it.
Jon Jag Gay:
Absolutely.
Richard Oring:
Here's the first thing. Why are you using this mutual fund compared to another? That's a common question. And there's multiple answers the could give you. What's good today may not be good tomorrow, so at that time when the advisor made the purchase, that mutual fund might've been in the top of its category. And then over time, that mutual fund since you've held it has a lot of gains. So is it really not that much better where you want to sell it and then have to pay the taxes on the gains? And then what do you do after you sell it? Do you have to buy something? And is it worth saying that up front commission again? So those are the questions you have to ask yourself. That's what the broker's probably going to explain to you in that situation. Your advisor also can't track every single mutual fund out there.
Jon Jag Gay:
Right.
Richard Oring:
It's impossible. There's thousands, and thousands, and thousands of mutual funds. An usually what they do is they do their due diligence and they pick maybe one or two large cap growth fund companies, large cap value, and they build a buy list, let's say. That's the funds they want to track. It was great when they did the selection, it's still good, they're doing their due diligence. But let's say the mutual fund manager leaves. Well they're going to know about it because they're watching it.
Richard Oring:
They're not watching thousands of funds, maybe they're watching 20 funds. They have software set up to alert them, things like that. If the performance misses one month or one quarter, they're going to know. They're going to have conference calls with those fund companies and find out, oh they did a bad trade but it's going to take two months to recover from it. So they should know these kind of things. They're going to be comfortable building a smaller list of funds to track than it is to find the best of that fund every other week when a new client walks in their door.
Jon Jag Gay:
Sure.
Richard Oring:
And you want your manager, your broker to know those funds inside and out. You don't want them to be stagnant and just buy stuff and then you find them on the golf course in the middle of the workday. You want them to be active and doing their research. And having too big of a list is impossible to manage. And then hopefully you don't ask a question and they stare at you with a blank face because they don't have the answer.
Jon Jag Gay:
That's not a good place to be.
Richard Oring:
What's even worse is if the answer is, "Well, the mutual fund salesperson takes me out to lunch every three months," or, "They support my seminars for me.
Jon Jag Gay:
Geez.
Richard Oring:
That's not what you want to hear. It's interesting, the rules in our industry. When you buy a commission product, it has to be suitable at the time of purchase.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
So five years from now, it's not the same requirement as the day you bought it.
Jon Jag Gay:
Got it.
Richard Oring:
In a fee based account, an advisory account, we act as a fiduciary. Not only does it have to be suitable at the time of purchase, it has to be suitable as long as you own that account with that advisor. So as you get older or things change in your life, they need to be communicating with you and adjusting your allocation for your current needs. They also better be looking at if they fund is underperforming, should they get out of it? If not, they better have a reason. If they got examined by their home office or FINRA, or SEC, state regulator, they better have documentation why they're using those investments within their portfolios, especially if it's underperforming.
Jon Jag Gay:
Yeah, it is important to emphasize that a fiduciary by law has to have your best interest at the priority. And I know that you work that way, Rich. And I know there's a lot of advisors out there who do that free portfolio review, but that's not always what meets the eye, right?
Richard Oring:
No. It's funny, before this podcast I Googled a whole bunch of different things. And so many websites offer a free portfolio review.
Jon Jag Gay:
Right.
Richard Oring:
We're not idiots out there, guys. Let's admit it. We're doing it because it's very easy to be a portfolio when we know what the past performance was.
Jon Jag Gay:
Right.
Richard Oring:
So if you come to me and you show me a portfolio and it did 10%, it's very easy for me to build a portfolio that could do 15% using past performance numbers. That's not what you want on a free portfolio review. And I'm not saying that's what they all are, but I don't do free portfolio reviews unless it's like for an existing client of mine and they want me to look at their 401(k).
Jon Jag Gay:
Sure.
Richard Oring:
But if someone comes to me and wants a portfolio review, I'm going to charge. Not like thousands of dollars. It's the middle. It could be a couple hundred, it could be up to 1500 depending on how many accounts, how many holdings, and how detailed it is.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
So for me what a portfolio review, is understanding the client's goals, their risks, maybe their history of investing. I need to look at the tax return.
Jon Jag Gay:
Yeah.
Richard Oring:
Because I don't want a portfolio to cause unnecessary tax or income in that portfolio which might prevent the client from taking deductions or losses because of phase outs. That's big. I will tell you I don't think most free portfolio reviews is taking that into consideration. Then I'm going to look at the positions and the allocation. I'm going to first see is the allocation suitable? Then I'll drill down and look at the investments to see if they're cost effective, efficient, things like that, and the risk associated to it. When I'm all done reviewing that portfolio, there's times where I go to them and say, your advisor's good.
Jon Jag Gay:
Yeah.
Richard Oring:
They're doing good. If you want to ask questions or let them know after reviewing the tax situation and things like that, these are things, as good of a job they're doing, these are things I think you should be communicating with them so they're aware of it. Because they might not be doing financial planning, they might just be doing management of an account for them.
Jon Jag Gay:
I think this really speaks to the care that you take with your clients, Rich, because it's not about hey here are the numbers let me figure out how to goose these numbers and get them a little bit higher. To really help somebody with their investments, and we've talked about this in previous episodes, you really have to understand the psychology of a client, what makes them tick and what their goals are, what they want to do in their retirement. And their whole 360 degree picture. Because if you're not doing that, you're kind of doing them a disservice.
Richard Oring:
You're absolutely right. People will go to me like, what do you do? I manage expectations.
Jon Jag Gay:
Yeah, there you go.
Richard Oring:
That's what I do. If you really think about it... Yeah I can say with financial planning I get husband and wife to sit down, we ask questions, we document a plan, we make sure we try to get there. But with investments, I manage your expectations. So you come to me and say, "I want to buy," I'll give you a true example. I had a client come to me, older guy, never saved enough money, had $30,000. And he comes to me, he goes, "What can you do with this?" What do you mean what can I do with it? Figure out what you need to get to... It was never going to be enough for him to retire, never. I used to do his tax returns so I know what he did. I didn't touch his money, I didn't want it. He went and bought Canadian gold mine companies.
Jon Jag Gay:
Oh, geez.
Richard Oring:
So this was like in the early '90s.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
He's thinking like $30,000 he's going to turn it into $300,000.
Jon Jag Gay:
He's buying a lottery ticket is what he's doing.
Richard Oring:
This is not like buying Zoom in January of 2020 and then come March come out and now you quadrupled your money.
Jon Jag Gay:
Right. Everybody's looking for that golden goose and it's truly not the way to go.
Richard Oring:
Exactly. I want to share something with you. So as you know, I use professional money managers to mange my clients' money. And I also use them for my own money.
Jon Jag Gay:
Yeah.
Richard Oring:
This year, a couple months ago, so November was the first one. I don't usually go out and buy individual stocks for myself.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
I'm not allowed to buy IPOs so I wanted to buy a company near an IPO issue date. So I bought Peleton in November, I think it was like $23 a share.
Jon Jag Gay:
This is November of '19 you mean?
Richard Oring:
Correct. Then in January I bought Zoom.
Jon Jag Gay:
No kidding.
Richard Oring:
So I chose two companies because I used their product. That was my only reasoning. I didn't look at the financials, I didn't... Everything I tell people not to do, I did. I did it, Jag. I wanted to buy two companies near an IPO time period because I used the products. Totally the wrong reason to buy a stock. And it's funny, I felt kind of itchy going on with the election and everything which is kind of cool because we didn't mention that at all in this podcast.
Jon Jag Gay:
Thankfully.
Richard Oring:
I used something called a trailing stop loss. So what a trailing stop loss is basically you tell the stock if it drops 20% from its point, to sell.
Jon Jag Gay:
Right.
Richard Oring:
So let's say the share's $100 and then it goes to $130, the new trailing stop is off the $130.
Jon Jag Gay:
Okay.
Richard Oring:
I think it stopped out about two weeks ago on both of them. Remember once Biden win a couple days later, the tech stocks got hit pretty hard. And then when they started announcing the COVID vaccine again, 90% efficiency, Zoom and Peleton went down big.
Jon Jag Gay:
Interesting.
Richard Oring:
So I didn't buy as much back, but I bought some back. Again, don't call me for stock picks. I'm not that guy. I just was having fun and it worked out. I could probably share all the losses I did previous. There's a reason why I don't buy stocks myself.
Jon Jag Gay:
Got it. And if somebody does want to come to you, Rich, for help with their finances, look at their portfolio or to get their retirement on track, what are the best ways to reach you?
Richard Oring:
I'm a phone person. Feel free, pick up the phone. 609-924-2049 extension 126. Second way, go right to my website, www.ncfg.com that's Nancy, Charlie, Frank, George dot community. You can always shoot me an email roring@ncfg.com.
Richard Oring:
And Jag I want to say one more thing. And Jag I want to say one more thing. It's funny because in our industry a lot of people are working at home still.
Jon Jag Gay:
Yeah, I am.
Richard Oring:
I find it interesting how many people are learning how to do Zoom meetings.
Jon Jag Gay:
Yes.
Richard Oring:
I've been doing web conferencing for God knows how long.
Jon Jag Gay:
Sure.
Richard Oring:
10, 15 years. I actually got picked up in a magazine because I was marketing and working with seniors in alternate ways.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
So picked up clients throughout the whole country. But during this whole thing I wanted to see if any advisor was smart and started branding themself as a virtual advisor.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
There was a company out there I found, just one. But if you're interested, you don't have to live nearby to work with me. I would tell you right now, most of my meetings have always been on the web or on the phone.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
Probably at least 70 or 80% of them. And the reason why is, if planning involves husband and wife, trying to get them both in at the same time is very hard.
Jon Jag Gay:
Yeah.
Richard Oring:
So having Zoom meetings, that's the new terms for web conferencing, Zoom meetings.
Jon Jag Gay:
Right. You say Kleenex no matter what rand it is.
Richard Oring:
Right. They both could be at work on their lunch break Zooming in.
Jon Jag Gay:
Yeah.
Richard Oring:
It's great. So if you're looking for an advisor, even if you're... I'm giving stories today, but I had a client in Washington state come to me. He was one of my other reps I supervised, the mother passed away, and I was dealing with him as a beneficiary to help out.
Jon Jag Gay:
Mm-hmm (affirmative).
Richard Oring:
Throughout the process he goes, "Would you take me on as a client?" I said, "Yeah, why not?"
Jon Jag Gay:
Yeah.
Richard Oring:
Because we were doing things on the web. I said, "Are you unhappy with your current advisor?" He goes, "No, I love my advisor." I said, "Why do you want to switch? I want to make sure I don't make the same mistakes. I want to make sure I stay fit." He said, "My advisor is like 10 minutes down the street. I travel a lot, I'm in sales. I'm always on a plane. So when I'm home, the last thing I want to do is drive 10 minutes down the street to see my advisor, and I never do it. I've had him for years and I think I met him once." So we started working together, wife got involved, he got involved, and it was all over the web.
Jon Jag Gay:
There you go.
Richard Oring:
So I encourage people, even if they have local advisors and it's an inconvenient, ask them if they offer web conferencing Zoom meetings. And if you're looking for a change, call me.
Jon Jag Gay:
Sounds good. Richard Origin from New Century Financial Group. Pleasure as always, my friend. Take care, we'll talk soon.
Richard Oring:
Thanks, Jag.
Jon Jag Gay:
Richard Oring's branch office is 1 Airport Place, Princeton, New Jersey 08540. The branch phone number is 609-924-2049. Securities offered through Royal Alliance Associates Inc, Member FINRASIPC. Advisory services offered through New Century Financial Group LLC, a registered investment advisor not affiliated with Royal Alliance Associates Inc. New Century Financial Group LLC and Royal Alliance Associates Inc does not offer tax advice or tax services. Please consult your tax specialist for individual advice. We make no specific comments or recommendations on any tax related details.