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Questions to Ask Your Broker BEFORE You Buy That Mutual Fund
By JLP | July 12, 2006
Chances are, if you are reading this blog, you won’t be interested in investing in a load mutual fund. However, if desire to work with an advisor from one of the full-service firms like AG Edwards, Edward Jones, UBS, etc., there are questions you can ask to make sure you and your advisor are on the same page. These are just a few questions. There are others you can and should ask. These questions will get you started:
1. How are you getting paid for working with me? How much am I being charged for this? This is a fair question. If the broker is on the up and up, he or she will tell you with no hesitation. If they hem and haw and act offended by your questions, find another broker. It’s that simple.
2. How do these mutual fund loads and fees compare with industry averages? Once again, this a fair question. Make sure they tell you the average for the asset class you are purchasing since there are different fees for different asset classes. A good rule of thumb average for a large cap equity mutual fund is 1.40% per year management fee (this does not include the sales load). Small cap funds and international funds are usually quite a bit higher, while bond funds are quite a bit lower.
3. Is my purchase of this fund helping you win a trip or prize? Yes, mutual fund companies sponsor trips and prizes for brokers who put the most money with a particular company. I think this is a HUGE conflict of interest when this information is not shared with the customer. If this question causes your broker’s face to turn red, find another broker! I have a feeling that this practice is coming to an end.
4. Does your firm have a special relationship with this mutual fund family? Some brokerage firms enter into special arrangements with mutual fund companies, allowing the brokerage firm to earn extra money from the arrangement. Once again, this information is usually not passed on to the customer. Therefore, you have to ask.
It is much better to ask these questions before you invest your money than after the fact. It pays to know the right questions to ask. These are fair questions to ask and you should expect fair answers. If the advisor answers these questions without hesitation and you accept their answers, then they might be a good advisor to work with. However, I still prefer the fee-only approach but I’m biased since I am a fee-only planner.
Topics: Investing, Mutual Funds | 1 Comment »
July 12th, 2006 at 2:36 am
Good questions which are surprisingly difficult to get clear answers to.
At least you are not living in Hong Kong where the fund managers still try to charge 5%+ front end load and where no load low cost index funds are almost unheard of.