As I was reading the paper the other day I came across an ad for a pretty prominent mutual fund broker-dealer. The ad was touting the investment acumen and performance of its mutual funds and fund managers. It mentioned how many of its funds had outperformed category medians over a certain span of years.
Then I read the fine print.
The fine print stated the following:
- Rankings are based on total return and do not include the effects of sales charges
- The rankings were based on the funds’ Class Z shares.
- Past performance does not guarantee future results.
- In providing these materials the company is not acting as your fiduciary as defined by the Department of Labor.
Let me summarize what these fine print statements mean. First, sales charges reduce returns. In other words, their rankings didn’t include the expenses associated with commissions earned by the salespeople that sell the funds. This would inevitably lower performance and I would argue, drop their rankings considerably.
Second, Class Z shares are generally offered only to the fund company’s employees, large institutional investors, or they may not be available altogether (the fund’s share class is closed to new investors). In other words, a typical investor has little chance of getting them.
Third, past performance is not a guarantee of future results. This statement I can agree with – and kudos to the company for mentioning it. However, the company also said most of their funds beat the category median – the midpoint of all fund returns in that category. Notice the company did not say their funds beat the benchmark – which is generally an index.
Fourth – their comment on not being fiduciaries is self-explanatory. In other words, keep your best interests in mind – because this company won’t. Their words, not mine.
What is interesting about this ad is that it was simply an ad. There is other, more nuanced fine print in company prospectuses. Read carefully, and do your due diligence when investing. If that seems too daunting, work with a fiduciary that will be comfortable explaining things simply, and in bold print.
*Originally published here.
Written by Sterling Raskie, MSFS, CFP®, ChFC®. Sterling provides expert guidance for your Retirement, Insurance, Education Funding, Investments and Income Tax issues and concerns. In addition to his contribution to the “Getting Your Financial Ducks In A Row” blog, you’ll find Sterling’s writings all around the internet. Sterling is also an Instructor of Finance at the University of Illinois Champaign-Urbana.
Contact Sterling: 630-40-DUCKS (630-403-8257) email@example.com
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