AboutJohn D Smith, CFP Expertise I can answer detailed questions regarding mutual fund investing, retirement planning, education planning and related financial planning/investment issues. I have a B.S. degree in Financial Planning & Counseling. I am also a Certified Financial Planner practitioner and have performed fee only investment management and financial planning services for the past 11 years.
Expert: John D Smith, CFP Date: 4/18/2007 Subject: IRA advice needed
Question Hi John, thanks for volunteering your time. We had a financial advisor over the house on the weekend to talk about our IRA. He suggests putting it in this newer Oppenheimer allocation fund. I think it’s a fund comprised of other funds? The class A has a 5.75% front-end load & 1.26% operating expenses. He keeps saying it’s better than leaving the money in CDs & we’ll never see the fees on our statements.
I just talked with a lady at work about this. She says she would never invest in such a fund & that no-load funds are the way to go. She gave me a printout of a Fidelity fund, no load with only .67% operating expenses. Now we’re really confused because the financial advisor still strongly recommends his fund while this lady at work strongly recommends no-load funds. Any advice would be crucial & greatly appreciated, as we need to make up our minds soon.
Answer Hi Greg. First, let me comment on the advisor saying it is better than putting your $$ in CD's. In my opinion, this isn't an apples to apples comparison in that $$ invested in equity mutual funds should have a completely different objective than $$ invested in CD's. Also, his comment about you not seeing the fees on the statement is misleading. Just because you don't see the fees on your statement does not mean they do not exist! A front end load means if you put $10,000 in the fund and are charged 5.75%, only $9425 will go into the fund and the remaining to him as a commission. As it relates to the internal expense ratio of 1.26%, this is a direct drag on performance. For example, take 2 funds; one has an expense ratio of 1.26% and the other has an expense ratio of .50%. If they both return 10% before expenses, the returns are much different after fees. Although this does not show up on your statement as a "fee" is shows up in the performance. I agree with your friend at work; in my opinion no load funds are the way to go. Keep in mind however that if you use an investment professional, he or she has to get paid in some fashion. In the Oppenheimer instance he gets paid on commission. I don't happen to like this arrangement. I feel fee only arrangements offer more unbiased advice but there are often times minimums required for this type of advice. If you choose to pay a commission (or any fee for that matter) on a fund or advice you should hope to recoup this additional cost in extra performance achieved from the advice. I will add one more wrinkle to this whole thing; your friend mentioned a Fidelity fund with an expense ratio of .67%. Although this seems cheap compared to the Oppenheimer fund, this is still too high in my opinion. You can easily go out and find no load funds with expense ratios far less than this. I would recommend that you go to www.vanguard.com. Enter the personal investors section of the website and go to the planning and education tab. There is great information here on mutual fund investing. If you have any questions after reviewing this, please let me know.
