Expensive advice can defeat the purpose of no-load funds

STAYING AHEAD

March 28, 1993|By JANE BRYANT QUINN | JANE BRYANT QUINN,1993, Washington Post Writers Group

New York -- In the beginning, no-load mutual funds wer supposed to make investing easy and cheap. There were only a handful of them; to buy, you just picked up the telephone. No-load funds offer diversification and charge no sales commission.

Fast-forward to 1993. You now have 874 no-load mutual funds to choose from, according to the Investment Company Institute. Many investors are still happily picking their own. But some are so confused that they are paying a fee to have someone choose and monitor their no-load funds. These services are known as "mutual fund wrap accounts" or "asset allocation accounts."

Goodbye cheap investing. Some planners charge a modest 0.5 percent of your investment. That's a good deal. But if you don't watch your step, you could wind up paying 1.5 percent to 2 percent (or more), every year, for a portfolio of no-load mutual funds whose purchase would not cost you a dime if you did it yourself.

On a $10,000 investment, growing at a gross of 11 percent annually, a 1.5 percent charge would cost you $3,338 over a decade and knock 14.4 percent off your investment's value.

If all you want is one-time advice on picking mutual funds, you do not need these advisory accounts. Try (1) brokers or planners who earn their money by selling funds that charge sales commissions; or (2) certain "fee-only" planners, who recommend only no-load funds (so you pay no sales commissions) but charge $100 or more an hour for their advice.

In a full-service, advisory account, the broker or planner also monitors your mutual funds, sends you monthly or quarterly performance reports and makes periodic recommendations for change. This should not cost any more than 1 percent. That generally knocks out the mutual-fund wraps at big brokerage houses, which tend to charge 1.5 percent.

Your alternatives are independent brokers and financial planners, whose range of fees can be wide. Take the 300 brokers who make their purchases through the new Strategic Asset Management program of the broker/dealer, LPL Financial

Services. They can charge between 1 percent and 2.5 percent on customer accounts of $25,000 (the minimum investment), up to $250,000. The fees cluster toward the 1.5 percent area, especially on smaller accounts, which are more expensive to service, according to David Root, LPL's vice president in charge of asset allocation. On larger accounts, the fees decline.

LPL's brokers work from an approved list of mutual funds plus three model portfolios (soon to be five), developed by LPL to meet three standard investment goals.

Other financial planners develop their own mutual-fund recommendations. Lynn Hopewell of the Monitor Group in Falls Church, Va., charges 1 percent on accounts of $200,000 (his minimum) up to $1 million, and less for larger accounts. Janet Briaud of Briaud Financial Planning in Bryan, Texas, says her fees are negotiable but tend to run around 0.5 percent with a $1,000 minimum (which may raise her percentage fee on accounts smaller than $200,000).

But these fees are only part of your cost. Each mutual fund also charges an annual management fee, running from as little as 0.2 percent to more than 2 percent. You will find this fee -- called the "expense ratio" -- on the first or second page of the fund prospectus, which the broker or planner should give you. If your planner charges 1.5 percent and your funds do, too, you will pay 3 percent annually.

There are plenty of good mutual funds that charge 1 percent or less. In my opinion, your combined fund and planner's fee should not exceed 1.5 to 1.7 percent annually.

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