In interviews with National Underwriter, financial advisors offered a number of tips on how they use mutual funds to help their clients stay on track to meet financial goals. (See chart.)
“The most effective method for getting clients to save more is to do a financial plan for them,” says Jeff Broadhurst, a financial advisor with Broadhurst Financial Advisors, Lansdale, Pa. Usually, they are not saving enough to meet their goals, he continues.
“So, after they see they are going to have a poor retirement, they are more willing to put additional money into mutual funds or other investments,” Broadhurst says.
John Ritter, a certified financial planner with Ritter Daniher Financial Advisory, Cincinnati, Ohio, says he starts with a client’s comprehensive financial plan and then looks at whether there is enough money to reach his or her goals. “We try to take the emotion out of the question. The numbers are the numbers.”
Once there is a grasp of the numbers, Ritter says that based on age and fact pattern, his firm will look for low expense ratio funds, particularly if the investor is going to be contributing on a monthly basis. The reason, he explains, is that he does not want his clients to have monthly transaction fees. Funds with institutional class shares that give back 12b-1 fees are used, he says.
Michael Garry, a certified financial planner with Yardley Wealth Management, Newtown, Pa., also notes the importance of going through the financial planning process before making any decisions on mutual funds.
For instance, he says, discussions on retirement planning will usually uncover a shortfall and how that shortfall can be eliminated. Mutual funds and exchange traded funds are ways that a shortfall can be eliminated, he says.
Once agreement is reached that more saving is needed, Garry typically recommends index funds, which he says are cheaper and more tax efficient.
Most clients understand the value that mutual funds can bring, says Garry, but some clients are reluctant at first, preferring individual stocks.
There is a disconnect between return in relation to volatility when individuals buy individual stocks, he adds.
Garry recounts a former co-worker whose husband was one of five analysts on a large fund and seemed to work around the clock at his job. He says it is “ludicrous” to think consumers can educate themselves on the Internet and then think they can beat that kind of effort.
Doug Taylor, a certified financial planner with Taylor Wealth Management, Torrance, Calif., says when a client insists on investing in an individual stock, he recommends putting aside a small amount, perhaps $10,000 to $15,000 out of a portfolio, which he dubs “Las Vegas money.”
Mutual funds can provide diversity to money in 401(k) funds that might not have the same diversity of fund types, he says.
Diversity is a major reason to use mutual funds, says Kevin Brosious, a certified financial planner with Wealth Management, Allentown, Pa. He says he reminds clients that have a lot of money invested in individual stocks, often company stock, of Enron and what happened to those workers who were heavily invested in that stock.
There is no sense in investing in a security with accompanying business and market risks when a client can diversify away that risk by investing in a mutual fund, he adds. When a client insists on being in a particular security, Brosious says he limits the holding to no more than 5% of the total portfolio.
“We feel comfortable with a mutual fund as the foundation tool in an investment,” says Jeffrey Golden, a certified financial planner with Circle Advisers, New York.
And, he says that better quality of rating services for mutual funds as well as disclosure about funds following an industry shake-up have made it easier for a planner to perform due diligence.
Additionally, disclosure makes mutual funds a more appealing investment than hedge funds, he says.
Golden says he will consider managed no-load funds for clients rather than index funds. He believes the fees are low enough and there are enough funds that can outperform an index fund.
He says he favors mutual funds over exchange traded funds because ETFs are often a slice of the broader market focusing on areas such as emerging markets or on commodities. They are more analogous to sector funds, he explains.
When a client wants to hold individual stocks, Golden says he limits the “play” part of the portfolio to 2-3% of the total.
What he does see is the need to have some investment in international equity funds with a range of 15-20% and, for the more aggressive client, up to 25% of the portfolio.
Golden says studies suggest that as a larger percentage of the value of the world’s securities comes from outside the U.S., the use of international funds for diversification will change. To reduce correlation between domestic funds and international funds, Golden says it may be necessary to further dissect international funds to see how portfolio managers are investing in order to maximize diversification.