The A-B-C's of Shares

[This question originated from a reader who read the article "Don't Be Taken by B-Shares”]


Q. I believe you are right on with your feelings on B-shares. However, I have used the NASD.com cost analyzer and have to disagree with your use C-share rather than A-share comment. The NASD's cost calculator clearly shows your cost to be less expensive than c-shares and so too does the prospectus of the various fund companies.

In addition, if you qualify for breakpoints your cost is reduced further.

I would be interested in your thoughts.

A. I'm glad you enjoyed the article and thank you for taking the time to send me a note.

You are right that when looking at a prospectus or using the calculator on the NASD website that Class A shares will be shown to have a lower overall cost over an extended period of time.

The reason that I recommend C shares instead of A shares is because very few people stay in a given mutual fund for several years. C shares provide the investor and the advisor to make changes when needed. For instance, a mutual fund may have been a high-flyer in the late '90s but a rock falling off a cliff in 2000-2002. The star manager could leave and go to a different fund. The fund could have style shift (starts investing in a different category than originall anticipated).

Many times, it's the investor's situation that changes. Health, job, retirement, travel, etc. may result is using all or a portion of the funds invested. The economic climate can change.

Nowadays, more than ever it is important for an investor to have the flexibility to make changes to their investments or their advisor. The additional cost associated with C shares versus A shares is more than made up by their flexibility. Look at the cost of C shares vs A shares over a 1, 2, or 3 year period. The average time an investor stays in a fund is less than 3 years.

Some people make the mistake of thinking that since this is money that I won't need for X number of years that they will leave the money in the same investment for that period. That's usually not the case.

Hope this helps.

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Insurance - How much is too much?

[This question originated from a reader who read the article "Life Insurance: Too Much, Too Little or Just Right?”]

Q. I am 58 and have had 1/2 million life insurance on my 41 year old wife for about 10 years. We have two kids, 5 and 7. Her brother, 43 has 1 mil on his policy and he is influencing her to get same.

My agent who is conservative says talk to your business lawyer and trust lawyer and see what is best.

We have a 1/2 mil mortgage. The house equity should be at least 1/2 mil. I have investments and cash at about 1/2 mil. The cost of the additional 1/2 mil insurance is $1800-2000/year with a medical required. I have glaucoma and some slight but burdensome health issues. No heart record.

DO I REALLY NEED MORE LIFE INSURANCE????

House mortgage plus expenses would be at $5K/month. So if I die she has 1/2 mil and $60K to pay per year to stay in the house.

She should sell it and move into a nice rental house we have nearby. YOUR ADVICE IS MUCH WELCOMED. We need a financial planner by the way.

A. Thanks for your question--your concerns are common and I congratulate you for taking the time to get additional information!

Your situation may be more complex than it may appear at first. To provide a more specific recommendation I will need to talk with you further. It sounds like you have been very successful--how much do you have in investments and retirement accounts for which your wife would be the beneficiary?

You mentioned your agent suggested you talk to your business or trust lawyer--do you own a business? If so, can you tell me about it. I will want to know whether it is a sole proprietorship, LLC, Sub S, C Corp, etc. as well as the equity value and any business continuity plans. For instance, would the business provide any additional income to for your wife after your death?

Trust lawyer--do you have a trust? If so, is it a revocable living trust? Are there separate trusts for you and your wife? If so, is she a beneficiary of your trust, etc.

At first glance, it would seem to me that the amount of insurance should be increased, especially since you have two young children. The insurance will not only be providing for your wife but also for your children (depending on your trust situation, etc.).

For instance, I have 4 young children and my wife doesn't work outside the home (although she works awfully hard inside the home!). I have $2 million in life insurance coverage. Since I'm 40 it isn't as costly as it will be for you.

I'll be happy to talk with you about this further, without any cost or obligation. It would be best for us to set a time to speak by phone. If you would like to do that, send me an email with 1 or 2 different times that would work well for you and I will confirm one of them.

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Avoiding The Hands-Off Approach

Q. I am 41 years old and have an IRA through Fidelity but I have been uncomfortable in their hands-off approach with my account. My IRA account value is just over $110,000.00. It has grown tremendously over the last 2 years and I would like it to continue growing even when
the economy changes.

I also have a 401K plan from my current employer that I am contributing to, so I couldn’t contribute much to the IRA at this time.

How could you help me and what would it take to move any assets to your investment firm? Of course I would like some solid information before making this decision, but I like your philosophy about guarding your wealth.

Please let me know what your first thoughts are, if any, about how you could help me.

Thank You!

A. Thanks for your question.

Fidelity is a great firm and they are actually one of the custodians that my firm uses (meaning some of my clients have accounts at Fidelity that I manage). I don't necessary use any of their mutual funds but they are one of the best when it comes to the processing side.

I appreciate you concerns about a 'hands-off' approach. In my mind, the markets are significantly different than they were when I entered the business in 1987. Nowadays, with the proliferation of hedge funds, the markets are more easily manipulated for the profit of the 'Big Boys' and makes for a more volatile ride for the average investor who is trying to buy and hold.

The main value that my firm could bring in your situation is that we utilize a proprietary money management system that is specifically designed to protect you principal AND protect your profits. It provides many of the advantages that are associated with an Equity Indexed Annuity, but without all the shackles. There are no set-up fees, no commissions, no time commitments and no surrender charges.

I will be happy to tell you more about it...

Transferring an account is very simple. There is some new account paperwork that is easily handled through the mail (Fedex) and your Fidelity account is electronically transferred. You don't even have to talk to Fidelity. We handle the entire process for you.

A good starting point is for me to take a look at how you are currently invested. If you like, send me a copy of your IRA statement and your 401(k).

The reason for seeing your 401(k) is that I would want to coordinate any portfolio recommendation such that it utilizes the strengths of both accounts and creates an overall synergy.

I can also send you a packet that will tell you more about my firm. When you're ready, you can even talk to a few of my existing clients.

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Sales people 'pitching' Annuities

Q. Jeff, I found your web site via google.com. I've printed out some of your articles, particularly the one from last November on the 'next scam'--indexed annuities.

I am 66 and my husband is 76. We recently had a face-to-face meeting with a gentleman we met at a financial seminar for seniors, regarding the purchase of an index annuity--his suggestion for the 'safe' and 'simple' process you talked about. He is an independent agent under the umbrella of a company in San Diego called *****.

Currently we have all of our assets (aside from our house) in the
market. The mutual funds we've purchased have performed well. We work with a conservative broker who we've been with for 20 years. Granted he's a stock broker, however, not an independent advisor.

The insurance advisor I spoke about above, suggests we put my SEP-IRA into an Index Annuity in order to have a platform of safety for our later years. However, after all I've read on the Internet (an extensive search), including your articles, I am reluctant to proceed even though it SOUNDS good when presented in person. Such sales people do know how to 'pitch' their products!

I'm thinking that the best route for evaluating our financial goals is
to meet with someone whose job is to advise only, someone who does not sell products, but merely charges for his or her consultation.

What do you suggest?

Thank you for offering to answer questions.

A. I congratulate you on your desire to research the 'advisors' suggestion. That inherent skepticism will serve you well as you approach investing--whether you're approached with an EIA or any other product.

I would be happy to provide you with some specific recommendations, free of charge. I would let you know the advantages and disadvantages of any current investment positions you have, review your allocation in terms of your needs and comfort levels and suggest various alternatives for you to consider.

The best alternative may be for you to stay with your existing broker. If so, I will let you know. I privately manage money for a small number of clients using a proprietary method I pioneered that provides many of the protections of an EIA but there are no set-up fees, no time committments, no commissions, and no surrender fees.

For some people, my method is a great alternative to traditional mutual fund buy and hold investing--but it's not for everyone and I understand that.

Of course, there's no obligation for me to do this review. The main purpose of it is to give you an unbiased review that will give you the facts to make an informed decision.

What I would need to know would be the current investments you have. If you have IRA money and non-IRA money it would be helpful if you would tell me which investments and amounts were in each.

You've already mentioned your ages. Do you look to your investments to provide current income?

Additionally, at your request, I can also provide a basic review of your overall situation. With today's complex IRA and estate planning laws, there are many small things that people can do that will save them a fortune over the long-run--things that aren't necessarily investment related. For instance, the beneficiary designations on retirement accounts are a major area where people unknowingly lose tens of thousands of dollars.

Just let me know, I'm here to help any way I can. Again, you've done the right thing in researching any advisor's recommendation!

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Testimonials

"Mr. Voudrie was helpful and gave me some very good information
regarding annuities. I would recommend him to others who are in need of financial information." - Dave E.
* * *
"Mr. Voudrie answered my question satisfactorily and I found the article he recommended. I have no doubt that he can be trusted with questions and I would recommend him to anybody having financial questions."- Paul B-D
* * *
"...he was extremely helpful. Because of his advise, I did not move my 401K into Equity Index Annuities. I was grateful to find someone who would be honest with me in this respect. I do intend to use him again in the future." - Chris M.
* * *
"Jeff was very helpful. Investing can be a confusing issue so we tend to procrastinate. Finding an unbiased opinion is even harder. I appreciated his advice." - Sandy M.
* * *
"...I do find his columns educational and helpful. These things are good to know to protect ourselves and our hard-earned money... he gives good information that is easy for the lay person to understand." - Jan R.
* * *
"I just want to thank you, sir, for your time in answering my questions. I think we have a person who wants to sell EIA's to anyone and will do whatever he can to sell them. ...Thank you again for your help. It's wonderful of you to do this service for us older folks who don't have a good financial background. Thanks again, Mr. Voudrie, you were a big help". - Marlys

Don't make a financial mistake ruin your future - get free answers to your questions - Ask Jeff!

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TSP v Conventional Mutual Funds

Q. I'm looking for an alternative retirement savings opportunity over the TSP for federal employees. I heard some information on the Equity Index Fund (EIF) on the radio and was interested to know more.

Then I read your article on Google and now I'm confused. I save approx $300 per month and of course I'm looking for the best investment. The host of the radio show wants to schedule a meeting with my wife and I, but now after reading your piece, I'm lost.

A. Is your TSP pre-tax dollars? If so, it would be hard to find another vehicle
that could match it.

If it is not, then you have many alternatives. I do not feel an EIA should
be one of them.

If you are trying to grow your money (and aren't in the highest tax bracket)
then a mutual fund would make the most sense. You could use a no-load fund
like the Vanguard S&P 500 Index fund and there wouldn't be any fees or
commissions to add money or make changes. This would give you a great deal
of control. You would also be able to participate in all of the growth of
the stock market.

An Equity Indexed Annuity requires a very long time committment just so the
insurance company can earn back the commission it paid the agent. If you are
investing in it for growth, your are taking the risk of being in the market
but you don't get all the reward. EIAs limit your upside potential either
through caps or by limiting how much you can make in a month. You also lose
control. If you don't like it you can't get out without paying huge
penalties. Each $300 monthly contribution would have it's own surrender
schedule as well. If you needed at the money it would be very costly.

The only perceived advantage of the EIA is that your money wouldn't go down
in those years that the market does. But they require you to stay in them
for 10-15 years. There have been very few 10-15 year periods in which you
would have lost money in the S&P 500 index.

I hope this helps. Feel free to let me know if you have any other questions.

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Dynasty v. Revocably Living Trust

Q. How is a dynasty trust different from a revocable living trust?

A. Good question, a Dynasty Trust is irrevocable. Once assets are placed in it they can not be easily withdrawn. A Dynasty Trust is also a separate tax entity filing it's own return.

A revocable trust (Living Trust) can be changed at any time, assets moved in and out easily, and is taxed at your personal level (not a separate tax entity).

Really, they are designed for different uses. For your own assets you would typically look at a Living Trust so you have flexibility to make changes and probably aren't as concerned about protecting them from your creditors.

For money left to others, a Dynasty Trust presents certain benefits.

Thanks for the question. Let me know if you have any other questions or would like an information packet on my firm.

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Advisor Recommending EIA

Q. I have $220,000 in a variable annuity that carries a 7% penalty plus other expenses if I withdraw the money. My money is in a MM act currently paying nearly nothing and having fees taken out on a regular basis.
The advisor who sold me on The Security Benefit Variable annuity has suggested I switch to a Indexed Annuity. It would give me a 10% bonus to offset the penalty.

I have real reservations about the indexed annuity.

Any info you can give me would be appreciated

A. The first word of advice is to find a different advisor!!!

It is unconcscienceable for any advisor to recommend you take a large surrender penalty on one high-commission product to move it into another high-commission product. The compliance department on most large firms would never approve such a transaction. For instance, one of the firms I used to be with would only allow that if the surrender penalty was less than 3%.

What is being recommended in the annuity version of churning. You are in a bad position having an investment you are dissatisfied with but are trapped by the surrender fee. The switch being recommended would be extending the period even longer. It's like having a car worth less than you owe on it and the dealer allowing you to roll that into a loan for a new car. You would then owe more than the new car was worth--but the dealer would have made another commission!

The VA you are in should have a fixed account that is paying around 3% that you can use instead of the money market. That would be your best bet. Withdraw the penalty-free amount each year and move that part to something else--but something else without surrender penalties.

Check out my website at www.guardingyourwealth.com for additional articles about investing.

Also, if you would like some free information about the revolutionary (patent-pending) way I manage money that doesn't have any up-front fees, no commissions and no big surrender penalties, just let me know.

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Buying Annuities

Q. Jeff, I have to tell you that I am just sick to my stomach after reading your article. I am 38 and rolled half about $50K of my $125K retirement savings to the Allianx Masterdex Annuity. I did some investigation on the internet but really didn't come across much negative stuff. Much of the consumer beware info seems to be directed toward Elderly, so how bad have I been taken and should I fire my CFP?? In retrospect, it made some sense to take a portion of my portfolio and protect it. I am also a big believer that the world has changed post 9-11 and that any CFP that uses an 8-10 return as a benchmark over a period of time is probably being way to aggressive.

Let me know quick as I have him looking at some disability insurance and life insurance for me!


A. The fact that a CFP recommended an EIA for a 38 year old's retirement money is very concerning. Then to put 40% of your investable assets in it!!!

As a result, you have very little flexibility over that portion of your funds now. If you don't like the annuity, too bad. Any advisor should know that over a 20+ year period that the return will be significantly greater in even a no-load index fund while allowing you to retain complete control and flexibility. Of course, there isn't any commission on a no-load index fund!

If you are still in your surrender period window you should try to get out of it. If not, there isn't much you can do.

It is up to you how much you trust the judgement of an advisor, regardless of credentials, that has made such a recommendation.

Thanks for your question.

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How To Submit Your Question

To submit a question simply email your question to jeff@guardingyourwealth.com. Most questions are answered within 24 hours. You may wish to read through our Question & Answer archives to see if I've already addressed your question.

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Get Your Answers Here!

These posts represent questions that Jeff has received through email, by phone or in person and the answers that he provided. You will find a wealth of information here and we invite you to submit your own question to jeff by sending an email to him at jeff@guardingyourwealth.com.

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