The Lies About Money by Ric Edelman

Author:Ric, Edelman
Language: eng
Format: epub
Publisher: Free Press
Published: 2007-07-15T00:00:00+00:00

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You are more powerful than the New York attorney general and the SEC combined... Only you can withdraw assets from mutual fund companies.

~ Gary Weiss, author of Wall Street Versus America: The Rampant Greed and Dishonesty That Imperil Your Investments

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Chapter 5

How to Beat the Retail Mutual Fund Industry at Its Own Game

Deceptive marketing practices. Illegal market timing and late trading. Excessive and hidden fees. All of these are perpetrated on investors by the retail mutual fund industry. If you’re as annoyed by this behavior as me, you want to do something about it. So let me show you how you can turn this detrimental situation into a beneficial one.

First, let’s not get carried away. Despite the inappropriate business practices and illegal behavior that’s going on in the retail mutual fund industry, we must respond realistically. Just because you don’t like what’s going on in the world of mutual funds doesn’t mean you’re suddenly qualified to start picking your own stocks and bonds. No matter how amazed or disappointed you are, mutual funds remain the best way to invest. But that doesn’t mean we have to keep dealing with the same mutual funds in the same way we did before. It is entirely appropriate that we make important changes — and the opportunity to make those changes is readily available.

When the mutual fund scandal broke in October 2003 with revelations that fund managers at Putnam (then the fourth largest mutual fund company) were personally engaging in market timing and allowing certain customers to do so as well, my colleagues and I at Edelman Financial immediately realized that this story wasn’t going to be just about Putnam. We suspected that the entire retail mutual fund industry would become ensnared in a massive scandal unprecedented in the sixty-year history of the mutual fund industry. We quickly concluded, for all the reasons cited in the last chapter, that we needed to sell our investments in those mutual funds, and that we needed an alternative for ourselves and our clients.

Deciding to leave the retail mutual fund world was a relatively easy decision. The harder decision, which we debated intensely in a series of long, sometimes heated meetings, was where to go. I mean, it was one thing to decide to sell the mutual funds we’ve owned for decades, but what do we buy next?

Like Jean and I did twenty years ago, my colleagues and I started from scratch. Using a clean board and some markers, we considered — and ultimately rejected — every option available.

We considered picking our own stocks and bonds — and rejected the idea as being as foolish as diners who decide they’re great cooks merely because they don’t like the restaurant.

Or we could hire private money managers and let them pick the stocks and bonds for our clients. We seriously explored that idea and exhaustively researched dozens of money management firms. In the end, we rejected that idea as well, for these reasons:

• They lack diversification. These outfits tend to have limited expertise.

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