An old friend told me this week that he has three different IRAs, each worth just over a million. (His total in IRAs is over $3,000,000.) He's done well with noload funds but said he had always admired the American Funds family (other than the scandals of a couple of years ago.) He  has done pretty well selecting noload funds on his own and has his accounts at Vanguard, Fidelity and Wells Fargo Brokerage.

After speaking with him, the thought occured to me that he might benefit from establishing a relationship with a financial consultant and moving a million dollars of his IRA money into American Funds, to (1) get the professional help of an adviser, and (2) get American Funds Class A shares with no sales charge. (There's no commission on purchases of at least a million bucks.) My guess is that the financial consultant would be nevertheless be fairly handsomely compensated by A.F. for this purchase.

Do you think I should mention this idea to my friend? We are both aware that some financial consultants are much more professional than others and that some offer more than others to this kind of relationship. I don't want to throw my friend to the wolves of course.

 I'm going to sleep on this before I say anything to him. What are your thoughts? 

Hi Hiker,

You say he has done well so far, so why change anything?  What makes you think he will benefit from an advisor?  Although I do love AF, and getting them load free is very attractive, there is still an ongoing trail fee to compensate the advisor, additional cost he could avoid on his own.  I am not saying it is not worth it, just offering you more to consider.

So I think the answer could be a big phat hell yeah!  But not enough info to really tell, and I would certainly not be bold enough to offer a certain answer myself, but offer my thoughts anyway. 

You only speak of the benefit of an advisor and not how the funds themselves or management could benefit your friend.

Food for thought.

Regards,

Brian

Brian,

Thank you for your post. You're right; he's done well on his own although the task is becoming more of a daunting task as he ages.

 You raised a good point that I frankly hadn't even thought of: "the ongoing trail fee to compensate the advisor." I was thinking of recommending that he use a commission-based financial advisor (a.k.a. "broker") who would handle the transaction for no fee other than the "commission" that A.F. would pay him. (I've already confirmed with A.F. that the broker would be compensated in this kind of transaction even though the customer doesn't have to pay a commission.)  I would think the broker/advisor would offer some continuing guidance even if no "ongoing trail fee" were involved. Is this unrealistic on my part?

 Thanks again for your thoughts. I"m still thinking...but leaning more toward suggesting he consolidate everything into one IRA at Vanguard and use a balanced, passive approach to ensure that he gets the full return of the market. I may suggest that he sit down with Vanguard for a free financial review. Still thinking about what would be best.

so many choices.

Hi,

The idea is not without merit...however since your friend has done well by himself with his investing choices. that kind of amount may allow him to leverage Vanguard and his other brokerage firm to independently evaluate his choices in relation to his temperament and goals (for free hopefully) and figure out how best to continue his investment journey towards the future.

He can also run the advice given against a similarly constituted AF portfolio to see how the risk/reward profile compare with what he already has on hand and the advice given by the various parties.

The more information one is armed with, the better the ability to make an informed decision as to whether this(the advisor thing) would be a step in the right or in the opposite direction.

Hope this helps.

Wayne.

Hiker. 

Oh and yes I would to answer your question!

Wayne.

If a broker sells a customer AF funds, is that the end of the transaction or is there an implied continuing trail of advising that the customer has paid for with the load (even if it was waived?) Just thinking about what a broker really does. Do they just close the sale and forget the customer?

An old friend told me this week that he has three different IRAs, each worth just over a million. (His total in IRAs is over $3,000,000.) He's done well with noload funds but said he had always admired the American Funds family (other than the scandals of a couple of years ago.) He  has done pretty well selecting noload funds on his own and has his accounts at Vanguard, Fidelity and Wells Fargo Brokerage.

After speaking with him, the thought occured to me that he might benefit from establishing a relationship with a financial consultant and moving a million dollars of his IRA money into American Funds, to (1) get the professional help of an adviser, and (2) get American Funds Class A shares with no sales charge. (There's no commission on purchases of at least a million bucks.) My guess is that the financial consultant would be nevertheless be fairly handsomely compensated by A.F. for this purchase.

Do you think I should mention this idea to my friend? We are both aware that some financial consultants are much more professional than others and that some offer more than others to this kind of relationship. I don't want to throw my friend to the wolves of course.

I'm going to sleep on this before I say anything to him. What are your thoughts? 

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If he invests $1M, American Funds will pay the brokerage $10k.  How much of that goes to the advisor depends on the advisor's contract with the brokerage.  The brokerage then gets 0.24% a year on A shares, which if the balance remains at $1M, would be $2400 a year (at least the A shares I own - I am not sure if this is true of all the funds).  If the NAVs of the funds increase over time and he is set up for dividend reinvestment, his investment would increase over $1M so the fees going to the brokerage would increase in total amount since the percentage would be of a larger amount. If he is old, I would consider not going with dividend reinvestment, BTW.

Whether or not a financial consultant would anything to the mix, that of course depends on the particular financial consultant.

My favorite American Funds right now are CAIBX, CWGIX, AEPGX and ANCFX.

Hiker,

All the information I provide is based on assumptions as well as facts in the prospectus and also some very helpful info supplied by Al.  So not everything I state may be 100% factual, its hard to really know without being an insider.

AF sells through advisors only.  So whoever the advisor on record is will get the 0.25% trail fee.  So yes this is kind of like a load and meant to compensate for selling the product and advise given.

Kcallie states the advisor/broker/dealer....whatever....will get 1% upfront.  I have no reason to argue against that.  I am not sure where she gets that info, and would love to know.  I try to read between the lines to discover what really happens.  The prospectus clearly states what these investments will cost YOU, but does not spell out how anything is kicked back or shared among AF, Dealer, Advisor...again whatever.  So reading between the lines......the prospectus states a 1% CDSC will be levied against any redemption prior to 1 yr on any shares bought load free with purchases of $1M or more.  So why do they do this?  Probably to recoup something they payed out upfront to the dealer, so this is why I say I cant argue with the 1% upfront, it is probably true and makes sense, although it may be less than 1%.  Kcallie where do get this info?  From your advisor?

So I think the answer to your question is .....yes the broker will get something upfront, even though your friend will not pay it, and will get a trail fee ongoing, that will come out of his investment dollars.  Therefore, he should be able to expect ongoing service and advice.

So the deal should not just be closed and customer forgotten about, although I am sure this does happen allot :o)

I agree with Wayne, you can probably get good advice from Vanguard and set up a simple portfolio that he can continue to manage on his own.  I say this because you have not indicated anything about AF funds or management that offers any special benefit to your friend, other than the advisor that comes with them.

I think for many people, it would make great sense to invest in AF if you can get them no-load.  It really depends on what your looking for.

Hope I have been helpful.

Good Luck

Brian

Kcallie states the advisor/broker/dealer....whatever....will get 1% upfront.  I have no reason to argue against that.  I am not sure where she gets that info, and would love to know. 

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I am pretty sure that it is posted on their web site somewhere.  Maybe in a prospectus.  I will have to search around for the info.  Just give them a call - they will tell you the info over the phone if you call them.  I think they have to by law.

Correct Kcallie,

 Yep, the typical AF prospectus says they may pay dealers up to 1% for A-shares with no up front load.  I just dug this up after your post.

Also states, for B shares they pay 4%, and for C shares they pay 1%.  I dug this up after Al offered the info on the other post.  Its amazing how you miss this stuff!

Not sure why I care so much, not like it really matters to me, I guess I just get kind of anal and like to fully understand things and how they work.

for B and C shares, the CDSC allow them to recoup this money.  1% for C within one year, and the gradual reduction of CDSC for B shares, if you look at this it is clear they will get the upfront payment back and are not "out" anything.  If you hold the shares instead, the higher 12b-1 fee makes up the difference over time, prior to conversion.

However, for the A-shares bought at $1M, if they pay the full 1% and one sells right after the CDSC period of one year, then they actually lose money because they only got the 0.25% 12b-1 fee for A-shares and that assumes AF keeps it all.  This is why I doubt they give the dealer the full 1%, but I dont really know.  Who knows what kind of agreements they have!

Its crazy and just goes to show how complicated it all gets with loaded funds.  Its all a bunch of BS, you just dont see this crap with no-load funds.  One share class with out the 12b-1 gift that keeps on giving!  Ok, maybe two classes, but only because your willing to invest more at a lesser ER.

Again, I dont really care, I just find it interesting to disect this stuff.

Hope someone finds this interesting!

Brian

Brian, KCallie, Huck, et al,

Thank you so very much for sharing your insights and wisdom. I've thought a lot about this friend's situation and am planning to talk with him at length weekend. It's obviously his decision and he's done very well on his own, despite his advancing age. I'm simply going to stress the integrity, low costs, products and the people associated with Vanguard when I see him. I will suggest that he consolidates all his IRAs into one at Vanguard. And I'm going to also suggest that he then addresses his allocation. At his age and position, he should probably be balanced - around 50% equities, 50% fixed-income.

Thanks again.

At his age and position, he should probably be balanced - around 50% equities, 50% fixed-income.

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I think that really depends on his income needs and the equities whether a 50:50 split is a good idea for him.  If the equities are all large-cap, dividend paying steady-eddies, maybe.

Your question is of particular interest to me at this time since I am about 99% convinced to move my accounts to AF's class A shares and avoid the load fees.  I appreciate the comments from others.  I had planned to purchase the C shares for Income Fund of America and Capital Income Builder, and purchase bond funds from 7 other funds with lower ER's.  AF's bond funds with ER near 1.5% take too much of the relatively low returns.  I could justify the higher ER's on AF's equities funds.

After discussion with my FA, we decided that buying the A shares with sufficient amounts to avoid the loads made a lot of sense in my case.  I want to DCA into the funds over 12 months, and eventually have 70% in bonds, 30% in equities.  I can "park" the funds in AF's short term bond fund without much risk of loss and move into the other funds over time.  The ER is about .65 for all of their funds in the A classes.  That allows me to have competitively priced funds, and with good, conservative, active management.

Playbook. 

Playbook,

 Sounds like you've done a great job accumulating your investments. Interestingly, my thinking has shifted from using AF at all (for my friend) and instead toward consolidating funds to Vanguard. There are some real advantages of Flagship status which you should qualify for if your assets are sizeable enough to exempt you from AF's loads. And especially since you're thinking of putting 70% of your funds into bonds, I would suggest looking at Vanguard's bond funds, especially thier Total Bond fund, their GNMA fund (which contains only AAA federally-guaranteed mortgages) and their Short Term Investment bond fund. With Flagship status, my memory is that their Annual expense ratios are only around 0.25 or so, could be less. With bond funds in particular, expenses really do matter alot.

Hope this gives you something to think about.And again, congrats for being in the catbird's seat.

HikerNC,

I appreaciate your flattering assessment of my investments, but actually I have not been much of an investor at all.  The funds that we have accumulated resulted mainly from consistent savings over the past 15 years and conservative investments.  Thanks for the tip on Vanguard's Flagship status, but I began the process of moving into AF's funds today.  I said earlier that I was 99% sure.  After reading your responses and some other similar posts I decided to transfer enough into the A shares to avoid the loads.  I did have a discussion with my FA who confirmed that his firm will receive 1% from American as a result of my investment in the A shares.  In addition, his firm will receive 25 bp from American annually.  I don't really have a problem with either fee. I'm a high maintanence client and I want to talk with someone other than a customer service person when I have a question or concern.  I've spent over a year researching various funds: load, no load, actively managed, indexed, bond funds versus individual bonds, etc and kept coming back to American.  I think that is where my comfort zone is and I am just going to trust my instincts, my FA, and begin with a fairly conservative portfolio of 30% equities, 70% bonds.  I expect the fees will be in the 50-60 bp range on most of the funds I'll be in.

Good luck on the Vanguard Flagship,

Playbook 

There are some real advantages of Flagship status... especially since you're thinking of putting 70% of your funds into bonds, I would suggest looking at Vanguard's bond funds, ... With Flagship status, my memory is that their Annual expense ratios are only around 0.25 or so, could be less.

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With Admiral status, the ER's are far lower than even that! http://tinyurl.com/553z27

Gregory -

 You're absolutely correct! I should have mentioned that.

The Admiral class of Total Bond Market portfolio is 0.10% and for the GNMA fund: 0.11% - Pretty incredible.

After discussion with my FA, we decided that buying the A shares with sufficient amounts to avoid the loads made a lot of sense in my case.  I want to DCA into the funds over 12 months, and eventually have 70% in bonds, 30% in equities.  I can "park" the funds in AF's short term bond fund without much risk of loss and move into the other funds over time.  The ER is about .65 for all of their funds in the A classes.  That allows me to have competitively priced funds, and with good, conservative, active management.

[/quote]

In addition to CAIBX and AMECX, take a look at Capital World Growth and Income CWGIX and Capital World Bond CWBFX.  I wouldn't buy CWBFX right now necessarily as I think it is high and will come down a bit in NAV when interest rates go up, but it is a good fund to keep an eye on.

If their NAVs dip in the next few weeks, I will be buying more CWGIX, CAIBX and AMECX.  I hate to buy on the upswings, but I think these 3 funds are attractively priced right now and fear they will go up more if I don't buy soon.  There may be a dip in late summer, and maybe it would be better to park money in their short term bond fund until then.

Of course, if that racist fool Obama wins in November, all bets are off and God help us all.