MiB Smarter Money » financial education

Should I Consider a Health Savings Account and High Deductible Health Plan?

Jason — Fri, 10 Feb 2012 18:47:39 +0000

By Jason Van Steenwyk

Image Credit: Vector Portal

Health savings accounts, or HSAs, are increasingly popular health insurance and savings solutions, with millions of Americans now contributing to them. These tax-advantaged savings vehicles were first introduced in 2003, as part of a concept called consumer-driven health care or patient-driven health care. The concept: The assumption that if consumers were spending their own money, and not the insurance company’s money, they would spend less. The result: Lower overall health care costs. And ultimately, lower premiums.

Here’s how they work: To contribute to an HSA, you must also own a high-deductible health plan, with a minimum annual deductible of $1,200 for individual plans, and twice that for family plans. HSAs allow you set aside up to $3,100 in tax-deferred dollars, each year for individual plans, and lets families save up to $6,250. You can let the balance build up every year. If you have medical expenses, you can tap your HSA to pay anything under your deductible. Contributions to HSAs are tax deductible, and any withdrawals to pay for qualified medical expenses are tax free.

Is the experiment successful? Has the introduction of HSAs and HDHPs resulted in lowered costs? So far, the evidence is encouraging. Premiums for HDHPs are generally significantly lower than for conventional medical insurance plans.

Should I Consider an High Deductible Health Plan?

If you and your family are in good overall health, with no conditions requiring ongoing treatment, and your income allows you to contribute to your health savings account each year, then owning an HDHP and contributing to a health savings account may make great sense for your family. But remember that no single plan suits every family. Here are some of the major considerations:

Control. Health savings accounts give you more control over how your health dollars are spent. Care providers will be more eager to keep you happy, knowing that you, and not a distant, impersonal third party, are writing the checks.

Discounts. In some cases, your insurance company may have negotiated favorable pricing with the provider. This may also benefit you when you pay expenses that don’t meet your deductible – the discount may apply to your out of pocket expenses, too.

Employer contributions. Your employer may make contributions to an HSA on your behalf. This is like getting free money!

Premium savings. All things being equal, premiums are lower with high deductible health plans than with similar plans with lower deductibles.

That said, all plans have advantages and disadvantages. You should also be aware of the disadvantages of high-deductible health plans:

You may not be in a position to afford to contribute to an HSA. If you aren’t able to save in advance for your out-of-pocket medical expenses, even with the lower premiums, then that higher deductible is probably going to hurt you when you do have a medical event.
Even with an HSA, not everyone is comfortable with a minimum deductible of $1,200, or $2,400 for family plans.
Some people may skimp on needed preventative or diagnostic care if they have to pay out of pocket. However, some HDHPs provide expanded coverage for preventative and diagnostic services, as well as ‘first dollar’ coverage for immunizations, well-baby visits and other routine services with preventative value.
These plans may not be economical for those with ongoing, chronic medical needs requiring treatment every year.
Penalties for using HSAs for expenses other than qualified medical expenses are steep: Income tax plus a 20 percent penalty. HSAs are not good general-purpose savings vehicles. The tax law encourages you to earmark them for medical care.
HSAs no longer cover over-the-counter medications.

Do I Qualify?

You can contribute to a health savings account if you are not on Medicare, if you own a high-deductible health plan, and that plan is your only major medical insurance coverage. If you are married, and your spouse has coverage, your spouse must also have a high-deductible plan. Owning long term care, disability, health, vision, dread disease or other supplemental medical coverage does not disqualify you from contributing to an HSA.

How to Select the Right Retirement Advisor

Chris — Fri, 10 Feb 2012 00:06:53 +0000

A common challenge that most investors will encounter is selecting the best advisor. The main reason is because most sound good. Yet, underneath it all their track record is less than desirable. In the case of retirement planning, having the wrong individual can lead to disastrous results. Over the course of time, this can make it difficult in having sufficient funds to cover the upcoming expenses down the road. To ensure that everything works smoothly in the process of planning for retirement requires asking advisors a series of questions. This will help in deciding the best advisor for handling the portfolio.

What is your philosophy on investing?

Understanding the philosophy of the advisor will assist in determining how the portfolio will reach the objectives. This means looking for signs of what tools will utilized during the process. For example, in a discussion with a potential advisor an individual learns that he has a consistent track record of 10% a year. The basic philosophy is to purchase well-known companies. These areas will provide strong dividends and growth. This is telling the investor how the advisor could be a possible match. The reason why is because they are focused on purchasing conservative companies to achieve the individual’s investment objectives.

Do you have any complaints?

Photo credit: Alex E. Proimos

Always conduct an investigation of any potential advisor. The best places to locate information about the disciplinary record of the firm / individual are: through FINRA or the state securities commission. In all cases, the advisor and the firm should provide you with their CRD number. This is given to anyone who is licensed in the securities industry. Once the regulators are contacted is when they will list all disciplinary action taken. This will help in determining if a particular firm or individual is a good match.

Does the strategy make sense?

If a specific person or firm will refuse to discuss their strategy it is a dangerous sign. The main reason is the investments could be in areas that are very risky. This is designed to increase the overall return. In most cases, these tactics are often associated with hedging. This is an approach that involves purchasing derivatives (options) to reduce the risk. The problem is that when options are used there is the possibility of increased volatility. Once this happens, is when the value of the portfolio could have increasing amounts of pressure. As a result, investors need to find someone who will explain the strategy (in a way that makes sense). Anyone, who will not do this (outside of legendary investors like Warren Buffet), will more than likely not be able to outperform the markets over the long term.

Obviously, selecting the right advisor can be challenging for most investors. The reason why is because they do not know how to do this (based on their lack of knowledge and experience). Those who are able to use the above questions will identify the right person for reaching their retirement goals. This is the point that all investments will be focused on achieve consistent results for the portfolio.

Mutual Funds 101 – 5 Key Criteria for Picking a Mutual Fund

Jason — Thu, 09 Feb 2012 18:34:17 +0000

By Jason Van Steenwyk

Congratulations on taking the initiative to learn more about the investment world! It’s vitally important, and no one is going to be more interested in looking out for your future than you are. Mutual funds are crucial investments for most of us – especially for those of us who aren’t covered by a traditional pension plan at work. Mutual fund selection and analysis is a huge subject. But there are five key criteria to be aware of if you’re a beginning fund hunter.

Category

Analysts divide mutual funds into categories depending on what they invest in. A fund that invests mostly in stocks would be called a stock fund, or a growth fund, because most stocks are growth investments. We buy them as much or more on the theory that their share prices will rise than on the expectation of dividend income. However, there are many stocks that pay a healthy dividend.

An income fund, on the other hand, would own securities designed to kick out a reasonably steady income stream, such as bonds. A growth and income fund would combine the two approaches. A bond fund would normally be categorized as an income fund, since bonds generally pay steady interest payments.

International funds would buy investments from outside the United States, while global funds would own investments from all over. In theory, it is good to have some representation in the growth category as well as the income category, plus at least some fund shares in the international or global category. Don’t go overboard in any one direction.

Style

Funds can be conservative or aggressive. Conservative funds are managed with a primary objective of avoiding severe losses. Aggressive funds are managed to maximize long-term gains – even at the expense of short-term volatility. Again, you want a mixture of conservative and aggressive, at least when you’re young. As you get close to retirement age, though, roll back on the aggressive investments and increase your income-oriented holdings.

Also, there are two primary approaches to buying stocks: growth and value. Different managers will have a different style. Growth-oriented managers seek to buy stocks with earnings that are rapidly growing, and will seek to own them even if the share price seems pretty high. The expectation is that the stock’s earnings will eventually catch up and then surpass the level that currently justifies the stock price. This style is typically thought of as aggressive.
A value investor, on the other hand, seeks to buy stocks that are priced cheap relative to earnings or assets. When the market realizes the true value of the stock, reasons the value investor, the share price will rise. Meanwhile, the stock will have a ‘floor’ equal at least to the value of the company’s assets if the company shut down tomorrow, paid off all its creditors, sold off all its holdings and sent the proceeds to shareholders.

Expenses

Look for a low expense ratio, relative to other funds in the category. The expense ratio is the percentage you pay the investment company to run the fund for you. The lower the expense ratio, the more of the fund’s returns you get to keep. The lower the ratio the better. Most of the time, index funds will sport the lowest expenses. These are funds that aren’t managed by a team of analysts trying to buy stocks. Instead, the fund will buy every stock in a given market, such as the S&P 500. An S&P 500 index fund owns all the largest 500 stocks traded on the New York Stock Exchange and only those stocks. The fund gets all the performance of the index, but gives up a much lower expense ratio. In practice, this usually beats more expensive funds with active managers with portfolios trying to beat the market.

Manager Tenure

How long has the manager been on the job? Has it been at least one market cycle? If so, that gives you a chance to look up how skillful the manager has been in good times and bad, compared to others. A manager with a great track record in both up and down markets is rare… but may be worth paying a somewhat higher expense ratio for.

Load or No-load?

Loaded funds carry a sales charge, which goes to pay a commission to the broker or advisor who sold the fund to you. If you need the help picking the fund, it may be worth paying a broker – but you should get some good analysis or assistance for that money. The broker who gets your commission should provide value in some way, through advice, service, analysis, etc. Otherwise, there’s little point in paying a commission to a broker. In this case, or if you are confident in investing on your own, you can save money by buying a no-load fund over the Web.

These are just a few basic criteria. But if you understand them, you are a long way ahead of many investors, who seemingly buy funds at random. More fund criteria are coming in a future article.

Photo Credit: Images of Money

Understanding the Basics of Stocks and Bonds

Kristen — Tue, 07 Feb 2012 17:40:31 +0000

Photo credit: Alex E. Proimos

Whether you have some cash you want to directly invest or you are just trying to decide on the best plan for your retirement savings accounts, understanding how stocks and bonds work is critical. Although they seem intimidating, the concepts of stocks and bonds are actually quite simple for anyone to understand.

First, let’s start with stocks, which are what usually comes to mind when people think of investing. When a company wants to grow and needs capital, one technique it uses is going public and allowing individuals to buy shares of the company, represented by stock certificates. The shareholders take on partial ownership, with claim to a very small percentage of the company’s assets and earnings.

The confusing aspect of stocks is that their current prices are dependent on what people will pay for shares, not on how much the company has in physical assets or earnings. If people fear a company will perform poorly and start selling stocks, the price will decrease until demand rises again and individuals purchase stocks at that lower price. Therefore, stocks can be very volatile, increasing and decreasing in value throughout the day. However, in the long run, the stock market as a whole gains about 10 percent per year, making it a great long-term investment. This long-term gain is based primarily on actual earnings by the companies.

When investing in stocks, you can either select individual companies to include in your portfolio or buy an index, such as the S&P 500, to get a wide variety of stocks that will track market trends as a whole. The best strategy depends on whether you feel educated enough to select stocks on your own and how much you want to be paying attention to industry news and making decisions on when it is time to sell a stock.

Now, on to bonds. These are a way for a company to directly borrow from investors rather than selling shares of the company itself. When a company issues a bond, it promises to pay a percentage of interest to the bearer each year, in addition to buying the bond back for its face value after a specific number of years. Bonds are a bit of a gamble because the company could go under before the bond is bought back, but overall, they are less risky than stocks.

One of the interesting things about bonds is that their market price often varies from their face value. Depending on how well the company is doing and how many years are left until maturity, investors might offer to pay less than or more than the bond’s face value to buy a bond on the market.

Stocks and bonds are the two major types of long-term investments, along with mutual funds that are combinations of different stocks and bonds managed by a professional investor. Mutual funds are an easy way to invest without doing much legwork yourself. You can select funds with different balances of stocks and bonds to manage your risk and expected return based on your investing strategy.

Teaching The Entrepreneurial Mindset To Your Kids

Maricel — Mon, 06 Feb 2012 17:33:44 +0000

How are great entrepreneurs made? The answer is a classic nature versus nurture debate! Sure we have heard of successful, famous entrepreneurs and leaders, as well as well-known creative artists with the “CEO Disease”. People like Ted Turner, Pierre Peladeau, Abraham Lincoln, Vincent Van Gogh; even Steve Jobs was said to be diagnosed with this type of mental illness medically known as manic depression or bipolar disorder. Scientific evidence points to protein abnormalities in the brain linked to genetic origins as the cause of this disease that gives these successful people the kind of mindset to relentlessly pursue ideas and turn them into successful money-making ventures. A lot of entrepreneurs and people studying them argue that environmental exposure plays a bigger role in developing the entrepreneurial mindset; that the nurture part is even more significant than any natural predispositions.

Being a mother of two young boys, aged 9 and 5 years old, I tend to agree on the nurture part of raising kids to become successful entrepreneurs. Here’s what me and my husband have been doing with our kids.

Teach your kids to love money early on. “Money is the root of all evils”. Enough of this crap! We tell our kids that not knowing how to make money is the root of all evils. That not knowing how to manage your money is even more evil. You often hear my 9 year old discussing with his brother how to raise money to buy toys they want.

Teach them financial concepts at every opportunity. Then 4 years old, you would hear my oldest son talking inside the toy store: “Mom, I found this toy, the number at the back (he means price by the way) starts with 1 followed by two zeroes, that’s expensive right? Oh wait, here’s another one that starts with 1 followed by one zero then a period, I know this one we can buy!” Now 9 years old, before going to the toy store he asks: “What’s our budget this time Mom?” What’s more delightful is when he tells his younger brother that a certain toy is too expensive to buy!

Turn their passions into entrepreneurial opportunities. My oldest loves computer games so much. He does not only play them during his spare time but also create them on paper every chance he gets. He’d get so enthusiastic about creating games he ends-up asking me to hold a flashlight while drawing his games before bedtime so as not to disturb his already sleeping brother. We finally decided to buy him a game creator program (it pays to have a programmer for a husband) and told him he can create games in his spare time. We will create a website where he can post his games, told him that maybe he can generate income through advertisements first then from sales later. We got a big, approving grin from him!

Teach them to save early. They both have savings account from cash gifts, piggy bank savings but we have decided to follow Cameron Herold’s advice in his TED Talk on raising kids to be entrepreneurs and give them two piggy banks. All the money they earn or receive split into two, one for their savings, and the other for buying toys they want. Of course with a reminder on buying only toys appropriate for their age.

Encourage their obsessive tendencies as long as it is not alarming that will require medical attention. My 5 year old builds Lego creator toys very fast without looking at the manual. He relentlessly builds them until they perfectly fit together and looks like the pictures in the toy box. The same goes for cities he builds using wooden and magnetic blocks. We encourage him to speak what he think is wrong and why he is not yet satisfied with his creations. We offer suggestions and help him build them until he gives his nod of approval. I tell you, when we think everything is perfect, he proves us wrong every time by coming-up with a better design or lay-out. It sure tests our patience but he just won’t give-up until he is satisfied!

We know have a long way to go. Although our parents did not teach us financial education or entrepreneurship and we sure did not learn them from school; we’re glad we are teaching them to our kids.

Why Are So Many People Buying Gold?

Jason — Sun, 05 Feb 2012 18:29:05 +0000

by Jason Van Steenwyk

Photo Credit: Covilha

It seems like these days, gold is all you hear about on the radio. Talk radio and television is thick with advertisements hawking gold and precious metals as an investment. And these days, there’s even a thriving segment of the financial planning industry dedicated to helping people own gold in their IRAs and other retirement accounts.

So why the craze? Several reasons:

Crisis

We recently had a severe liquidity crunch that threatened to disrupt the entire financial system. When real estate prices collapsed, they took a lot of banks down with them. Other banks got nervous. Banks lend huge amounts of money to each other all the time – our system depends on banks covering each other when they have a limited short-term cash crunch. But with so many banks in trouble at the same time, many banks stopped lending. They couldn’t tell which banks would still be in a position to pay back the loans. The contagion spread to money markets – where cities, counties, states, and corporations borrow money from to make their payrolls. Only a massive intervention by the Treasury and Federal Reserve reassured lenders – otherwise paychecks would have bounced all over the country, causing an economic collapse.

The danger is not over yet, as of 2012, many investors feel. We could still see a replay in Europe, for example, as the euro is undergoing a severe crisis that may also endanger a number of major banks.

Over thousands of years, gold is the time-honored store of value. Governments rise and fall, currencies rise and become worthless. But gold has retained near universal acceptance as a medium of exchange and store of value. It is therefore an ideal hedge against the possibility of economic collapse.

Quantitative Easing

In order to stave off an even more severe recession, and to help encourage banks to lend, the Federal Reserve has been aggressively increasing the money supply, both by buying Treasury bonds on the open market for cash (technically, by crediting the reserves of banks, enabling them to lend more against their reserves), and by holding interest rates down. However, when you increase the money supply so much for so long, you run the risk of cheapening its value. Again, the Federal Reserve’s policy of quantitative easing – increasing the money supply in an attempt to stimulate the economy – risks flooding the market with too many dollars. This cheapens the dollar’s value against gold, land, and other goods that can’t be manufactured with the word of the Federal Reserve. When the dollar’s value falls, inflation is the result. When investors lose faith in the willingness of the Reserve to maintain the value of the dollar, they start trading their cash and paper money for gold and gold-backed assets. The price gold tends to rise with the increase in demand.

Speculation

Some investors want to buy gold or precious metals because it’s gone up recently. We call these “momentum traders,” though some of them may well be “dumb money getting lucky.” Protecting yourself against possible economic collapse and hedging against inflation are both excellent, rational reasons to own gold with part of your portfolio. But I would advise investing in anything today, just because it went up yesterday, for the same reason you can’t drive forward by looking in the rear view mirror.

Think of it: Gold is a rock. It does not create wealth. It does earn money. It does not pay a dividend. It is not so much an investment as a way to help protect yourself in case other elements of a traditional portfolio collapse.

That said, if uncertainty continues in Europe, if the U.S. Federal Reserve continues its aggressively easy, stimulative monetary policy, the price of gold and other precious metals may well continue to rise. On the other hand, a certain amount of ‘hot money’ may also have pushed the price of gold up beyond a sustainable level. In which case, gold prices may level off or decline. If the “hot money” panics and flees gold for something else, you could even see a sharp decline – though it’s impossible to imagine a reasonable scenario in which gold would fall to zero.

The bottom line – don’t rely on gold to make you rich. But it can help you survive and thrive when everyone around you is rapidly getting poor!

Can I Fund My Spouses IRA If They Don’t Work?

hank — Tue, 30 Aug 2011 16:00:26 +0000

Dear Hank – My wife is a stay at home mom. With a traditional IRA she is eligible for the “spousal IRA.” Can she open a Roth IRA as her spousal IRA, meaning I can invest $8,000 of my income, with half of that in her name? – Peter from Mississippi

Hey Peter – Good news – As long as one spouse has at least $8,000 of earned income, and your joint MAGI is under $160,000 (as you’ll reach your phase-out for ROTH in 2007) both spouses can contribute $4,000 ($8,000 total) to their respective Roth IRAs. Each spouse can contribute an additional $1,000 if he or she is age 50 or older by the end of 2007. So tap it out if you can! Thanks for the post!

Would you like to ask a question on MyInvestingBlog.com? I’m happy to answer it if I can – Contact me to submit the question.

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Interested in Going To Finance School?

Hank — Fri, 17 Dec 2010 02:39:20 +0000

A degree in finance will prepare one for a career in banking as well as a position with prestigious financial institutions or with the government. A degree in finance is often associated with obtaining careers accounting and banking, but a degree in finance offers the training that can lead to a career in many different management opportunities. Such a career involves decision-making for government agencies, private organizations, and stockholders. A finance career involves understanding a client’s fiscal objectives and then problem solving, locating solutions, and finding resources to reach those goals. The minimum level of education in order to obtain a professional career in finance would be a bachelor’s degree; however, many students choose to move on to a MBA finance program. This allows one to vastly improve their career options. And as with other degrees pursuing a degree in finance in an online program through one of the many online schools is a very attractive option as many students can receive training from online finance schools.

The most common finance training programs include concentrations in corporate finance, financial planning, insurance, money management, commercial banking, investment banking, money management, or real estate. All of these specializations within a finance career will each require a different set of strengths and skills. However, there are basic skills any student in finance should have. Students considering a degree in finance require strong skills in mathematics as well as solid analytical, interpersonal, and problem solving abilities. A good deal of training can also be completed on the job or via work-study or an internship program. Experience can sometimes be nearly as important as education in order for one to move up in the industry, but of course this depends on the nature of the specialization. For example banks typically promote from within the organization for positions such as a branch manager, whereas other financial managers may enter their area of specialization with a formal degree-training program.

Even though experience is important, a finance degree from an accredited school is crucial. Distance learning has many advantages for working professionals. Distance learning via online schools offers flexibility, allows a student to work around their existing schedule, allows students to keep their jobs and attend school, and is affordable. Getting professional certifications also allow for the opportunity to increase ones skills and qualifications and there are a variety of associations that offer professional certifications.

Online finance degree programs may offer classes in areas such as financial management, management information systems, corporate financial management, or organizational development. An MBA program in finance allows students to extend their education and focus on research, corporate development, and statistics. A finance MBA can often be completed in less than two years and allows a good opportunity for students who wish to further their finance career.

The schooling is worth it. The demand for experienced and degreed professionals in finance or financial advisers has risen especially as companies are confronted with a competitive economy. Insurance carriers and banks employ most of those with finance degrees, but financial managers can be found in nearly every area of industry. With the shifts in the economy the need for financial managers and those with areas of specialization in finance is expected to rise at least through the year 2014. The potential for growth in the securities and commodities industry is expected to be most favorable. The median annual earnings of financial managers was $81,880 in 2004.

Going to finance school is an option that can pay big dividends in a student’s future. There are a number of different programs and potential degrees that can fit nearly anyone’s interests. Online schools offer the flexibility and affordability to allow a student to pick the right area of specialization for them, learn at their own pace, and keep their existing job.

Why Are Mutual Funds Such A Popular Investment Vehicle?

Hank — Thu, 27 May 2010 19:24:37 +0000

Did you know that there are more mutual funds than there are stocks? Have you ever wondered why mutual funds are such popular investment vehicles? Conventional wisdom will tell you that mutual funds are popular because they are less expensive than stocks because they do not carry hefty commissions, they allow the little guy to invest in the markets because the start-up capital can be small, they offer diversification because they hold many investment positions, and finally, they are managed by professional money managers. Unfortunately, these are the reasons given to investors, but the truth is that mutual funds are popular because mutual funds are extremely profitable to the investment industry.

Mutual funds may seem inexpensive because the costs are hidden. Mutual funds are loaded with fees such as sales charges, management fees, and 12b-1 fees. Sales charges are front-end loads charged by the broker or advisor for buying mutual fund shares, and charges for selling mutual funds shares are back-end loads. These charges depend on the various classes of shares. For example, Class A shares usually have front-end loads and Class B shares usually have back-end loads. Front-end charges can be as high as 8.5 percent for Class A shares. This means that an investor with $10,000 is only putting $9,150 to work while $850 goes toward the sales charge. In addition to sales charges, someone has to manage the fund and therefore, also has to be paid a management fee. This fee can range from 0.10 to 2.00 percent per year and depends on the fund itself and its investment style. Another type of fee is 12b-1 which is paid to brokers or advisors to pay for marketing, distribution and service costs. The Financial Industry Regulation Authority (FINRA) allows funds to charge 12b-1 fees as high as 1.00 percent on an annual basis.

Adding up all of the fees, it is no wonder that mutual funds are popular on Wall Street. It’s a great business because everyone except the investor benefits from this investment vehicle. Unfortunately, for the investor, the returns are not as good as the investment industry promises. The average investor in a stock-oriented mutual fund generated 5.66 percent per year over the ten-year period ended December, 31, 2007, according to a study by Dalbar, Inc., a leading financial services market research firm. Notice that this doesn’t include the stock market decline in 2008.

But are all mutual funds bad? No, not all mutual funds are created equal. Saying that all mutual funds are the same would be equivalent to saying that all restaurants are the same. Mutual funds are simply investment companies that make investments on behalf of their investors. There are some mutual funds that delivered fabulous investment performances for its investors and did not charge outrageous fees. But the problem is that most of the investment public would never know about them because these funds don’t advertise much, and they don’t pay high commission fees to entice brokers and advisors to sell them. In other words, they don’t play the Wall Street game.

About the author

Mariusz Skonieczny is the founder and president of Classic Value Investors, LLC, an investment management company. He is also the author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market.

Should I Buy a Loaded Mutual Fund?

hank — Wed, 13 Feb 2008 08:01:48 +0000

My mother is not very financially savvy – and when I try to explain anything to her; it can often times take the better part of an hour. It may be her age or the fact she never had any financial education being a stay at home mom, but I like to try to give her the best info possible. This was a specific instance of that time.

She mentioned that she was heading into an Edward Jones investment rep this afternoon and wanted me to chime in with a few questions to help her make a good decision. Like I said, she is 55 with no retirement money aside from about 20k she cashed out of a universal life insurance policy she had out on my dad that was taking payments out of the equity it had built up.

That’s another conversation, but for this one, we’re focusing on how her conversation went.So the rep called me up and we had a conversation about what my mom had, and what she was doing now, and where she was headed. The first thing he mentioned was that “we need to start making your Mother’s money work for her NOW!” I obviously agreed and mentioned to him, “what funds do you recommend she get in?”

He came back with a handful of loaded mutual funds and I just stopped him in the middle of it and ask him why he wanted to put my mother in loaded funds. He actually was very up front about why. He said, “Clearly because that is how I make my money.”

I agreed and proceeded to tell him that we weren’t interested in his services and thanks for his time. He proceeded to tell me how “scary” and “difficult” and “dangerous” it was to be investing on your own. He said, “There are a lot of pitfalls along the way. Wouldn’t it be nice if you had someone to help you?”

I responded, “Yes, that would be nice to have someone that would warn me about financial advisors like yourself.”

That stopped him in his tracks and my mother took off.

New to the blog? Asking yourself, “what are loaded mutual funds exactly Hank?”

When I say “loaded mutual fund,” I mean a mutual fund that carries a sales load. A sales load is a mutual fund commission paid to brokers like this Edward Jones rep for selling you something you don’t need their help in buying. Sales loads do not benefit you, they benefit, and ONLY benefit the person selling them to you, much like an insurance policy.

Load fees typically range from four to eight percent and the way they are paid varies:

1. Front-end load (usually class A shares) – you pay the sales fee up front to the helpful broker.
2. Back-end load or deferred load (usually class B shares) – you pay the sales fee on your way out to your helpful broker.
3. Constant load fund (usually class C shares) – you pay the sales fees every year and might even have to pay a full load when you sell to the fine person selling you this.

Well Hank, I really like paying extra money for things I can do for myself (joking) what else is it costing me?

Well, think of it this way. By purchasing a loaded fund, you’re starting two steps behind. Let’s use simple numbers, say you bought a loaded fund with $10,000 that carried a 5% front end load. Well, as soon as you sign on the dotted line, you’ve just lost $500, so you’re starting with $9,500.

Think of the same guy that has the entire $10,000 to run on – who is going to be ahead in 1 year? 2 years? You can’t catch up because you’re starting behind. Think of it like an oval race track. If you are both running in the same lane, you are starting 5% of the way behind them, and will likely not catch up.

But Hank, they broker told me that these funds were spectacular and that I should make more from them than a no-load fund. Isn’t that worth it?

If a broker really did tell that to you; you are in a bad situation. Turn and run immediately. Do not pass go, do not collect $200. I can almost guarantee if you give me a loaded mutual fund ticker symbol, I can find a very similar NO-load fund out of the 12,000+ funds out there.

Feel free to contact me if you don’t believe me; I’ll find one for you. How many different ways can a sales guy scare you into buying the fund? Anyone else have some wise lines brokers have used to get you in their grasps and in to your pockets? I think if I wouldn’t have figured it out on my own, I’d still be playing Poker to take care of my retirement.
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