Russell Bailyn -

A good financial advisor will try to explain concepts in such a way that their clients can really grasp the knowledge. As obvious as that may sound, many people who work with financial advisors do not learn much about how to make financial decisions, they merely pay to have those decisions made for them. Mutual fund investing is one such financial concept that all investors should know about. If you haven’t already, you’ll likely encounter mutual funds at some point during your financial life, through either your individual savings, or a company retirement plan. According to the Investment Company Institute, which compiles statistics on various investment classes, currently over $9.5 trillion is invested through more than 10,000 mutual funds in the United States.* In fact, many retirement plans require their participants to use mutual funds rather than individual stocks to prevent them from taking on too much risk. Imagine if inexperienced investors decided to put the full balances of their 401(k) plans into the stock of a single company? What if the company became distressed or went bankrupt? They could say good-bye to their retirement nest eggs, possibly forever.

My own first taste of the stock market was with mutual funds, because I knew they were professionally managed and didn’t require very large initial investments. That turned out to be a great decision, as I still have my mutual fund investment and contribute to it monthly. So, what exactly do you need to know about mutual funds? We’ll start with the basics and then jump into a more detail.

What are Mutual Funds?

Mutual funds are pools of managed money. Their primary purpose is to provide easy access to diversified portfolios of securities. Upon buying shares in a fund, you are really buying smaller position in the underlying securities. Depending on what the fund’s style is, you might be purchasing stocks, bonds, treasury bills, or any other allowable securities. Some mutual funds may be smaller, with only a few million dollars under management, while others may have thousands of shareholders, and the total assets of the fund could be well into the billions. A small percentage of the fund’s’ assets, generally 1 to 2 percent, is deducted to pay management fees and other operational expenses.

When you buy shares in a fund, you are essentially hoping for the underlying investments to do well. This is in part determined by how good a selection job the fund manager is doing. Some managers obviously perform better than others, but jumping into a fund that is having a good year does not mean you're bound to make money. In fact, while looking at trailing performance over 5- and 10-year periods tends to be a popular performance measure, it doesn't create any real guarantee as to future results of a fund.

The more important question to ask, prier to selecting a particular mutual fund or portfolio manager, is how you view your own tolerance for risk. This is essentially your willingness to watch your portfolio move around, both up and down, without becoming anxious or being tempted to redeem your shares. For some investors, the stock market is just too volatile; they may prefer bond funds or even money market funds, which are more conservative in nature and generally produce stable streams of income.

After you decide on the proper mix of mutual funds, you can start digging into which specfic fund families you like best. This process is difficult for a lot of investors because they may find 10 or more fund families that offer a similar type of fund. Does it really make a difference which mutual fund family you choose? Obviously some will outperform others each year, but again, choosing among fund companies for performance is anything but an easy task.

What you can look for with a bit more accuracy is a certain fund culture or sense of style. Some companies tend to have more aggressive portfolio managers who take risks, while others stick to index investing. Understanding the basic investment policies of a fund family may help guide you in the right direction if you know what you're looking for.

What Are Some Different Types of Funds?

Once you've investigated your personal risk tolerance and decided to purchase mutual funds, you'll need to understand the financial jargon attached to them. It would be easier if funds had names like "fund for conservative men in their 30s" or "technology fund for greedy youngsters with money to burn," but that's not how it goes. Mutual funds have standard terminology. In a typical retirement plan, you'll quite possibly see some of the following names:

• Large-Cap Growth Funds -- These funds invest in companies which seek growth. A fairly standard characteristic of these types of companies is that they reinvest earnings in the business rather than paying them out to shareholders as cash. The technology sector is a good example of a place to find growth stocks. A common understanding of these funds is that they offer you a great opportunity for profits, but come with a large amount of risk. Large-Cap traditionally indicates that the underlying stocks have market values of $5 billion or more. Growth funds can also be Mid-Cap, Small-Cap, or even Micro-Cap. These are smaller companies that you may or may not be familiar with.

• Large-Cap Value Funds -- Rather than seeking rapidly growing companies, Value managers seek out stocks which they believe should be trading at higher prices. This might include a company which makes a hefty profit but is in the midst of a lawsuit. Perhaps investors got tired of tracking progress on the lawsuit and the stock price didn’t resume a fair valuation after the suit was settled. Spotting these sorts of inefficiencies within stock prices is what could potentially make a good Value manager.

• Blend Funds -- These funds invest in a mix of growth and value stocks. They typically use a comparative benchmark such as the S&P 500 or the Dow Jones Industrial Average as a way of tracking their success. If they are outperforming the benchmark by several percentage points each year, the manager is considered to be doing a good job. If they are falling short of it, the investor is losing out because they could have purchased a low-cost index fund instead which would have produced a higher return. Blend funds are good for those who want an opportunity for growth along with the reassurance that their funds aren’t being invested too aggressively.

• International Funds -- Why stick purely to companies based here in the United States? There are plenty of companies making money oversees as well. Managers understand these opportunities and have designed funds which invest in stocks located outside the United States. There are plenty of variations on International funds such as “Emerging Markets,” which are generally considered riskier because they invest in economies which are considered young and emerging. Global Funds invest internationally as well but they may include US stocks within the fund. Naturally, hold on to your seat if you invest in risky International funds. While they may pay off, you’re playing with all sorts of risks including currency fluctuations and potentially unstable governments.

• Sector Funds -- These are mutual funds which invest predominantly in a single area. Sector funds tend to be more volatile than a broad market fund because the stocks have a very narrow focus; however, the risk level depends entirely on the sector. Utilities might not be considered as scary as emerging technologies. Some investors jump into a sector fund when they believe that sector is about to perform extremely well. An example of this would be investing in oil between 2001 and 2006 when turmoil pervaded the Middle East. Other investors choose sector funds as a hedge against other mutual funds in the portfolio. Some familiar sector funds may include financial services, healthcare, utilities, gold, and individual countries.

Why Do Mutual Funds Sometimes Receive Negative Press?

What we haven't talked about yet is why some people are so opposed to investing in mutual funds. We can consolidate the opinions of most of these people with two related factoids. The first is that mutual fund ownership tends to be expensive. The second is that mutual fund managers, on average, have not shown such outstanding returns to their investors. In fact, many have returned less to investors than investors would have gotten had they bought low-cost index funds instead.

How are these two related? Well, if you're paying both mutual funds' expenses and a commission to the broker, you're probably looking for some sort of return. If your funds don't perform well, and they also get reduced by various sales charges, fees, and expenses, you're not going to be a happy camper. For this reason, many investors stick to low-cost index investments.

What Else Should I Know?

Now that you have knowledge about what mutual funds are, what you can expect from them, and how to decipher some financial terminology, which funds are right for you? As I mentioned earlier, your own tolerance for risk will likely be an important factor in choosing a fund.

Two other important factors are the purpose and time frame for your investment. For example, if you're buying a fund today that you will contribute to every year until you retire, you may want to consider funds with at least a little exposure to stocks. The reason is that you can withstand a bit more volatility than somebody who needs the money in six months to buy a home. If you are trying to make a diversified portfolio of funds, speak to your advisor about finding a good fund mix that gives you adequate exposure to the market and isn't overly expensive. Remember, those expenses reduce your investment returns and add up over the years.

As always, feel free to e-mail me with questions or comments.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

*Investment Company Institute, "Trends in Mutual Fund Investing," August 31, 2006.

Posted by Russell Bailyn at 04:30 PM | Permalink | Comments ( 4 ) | TrackBacks ( 0 )

The chatter surrounding variable annuities is louder than ever. Investors want security regarding their money in the face of increasing amounts of uncertainty about the future. Variable annuities may feed this desire with two features not generally offered together: the opportunity for growth combined with a variety of guarantees protecting both the payment to a beneficiary if the account owner dies, and the income derived from the principal amount invested.

What differentiates an annuity from say, a mutual fund investment, is that an insurance company can actually offer “guarantees.” The investment sales community, especially in light of a recent increase in disclosure requirements, must be careful about promising things to clients which they can’t provide. Having a guarantee to cover one’s principal investment, and possibly the income derived from it, is extremely appealing. In a sense, it can act as a substitute for the pension which some may hope for but never see. If you don’t have a pension, the annuity will let you turn your own lump sum investment into a customizable stream of income with a reasonable sense of security.

As with most concepts that sound too good to be true, annuities have their flaws. They are often criticized for being expensive, not always justifying their costs, and being too heavily marketed. I don’t take a hard stance in favor or against the variable annuity as an investment product. I think for some people it’s a great option, and for others (generally those with a solid background in investing) it’s probably not the best choice. I prefer to put all the facts on the table and let you form your own opinion about the variable annuity. If you'd like me to assess your situation to determine if an annuity may be right for you, please call or e-mail me.

What are the Features of a Variable Annuity?

An annuity is a stream of income. An investor can make either lump sum, or periodic purchase payments during the “accumulation phase” of an annuity. At some point, the total value of the annuity (purchases plus investment gains) can be exchanged for a schedule of payments with a variety of different guarantees. The investor can usually customize to some degree the terms of the contract.

What makes an annuity “variable” is the fluctuating performance of the sub-accounts in which they invest. Typically, annuity sub-accounts are invested in portfolios which own stocks and bonds. The total contract value will vary depending on the performance of those underlying sub-accounts. Obviously some annuities will offer better investment options than others. This is something to consider when determining if an annuity is right for you. I’ve often found that multi-manager platforms—investment options that include popular sub-accounts from a variety of investment companies —are an appealing feature.

Because annuities include an insurance component, current law allows them to grow on a tax-deferred basis. This tax-deferral allows appreciation and interest to grow tax-free until withdrawn from the contract, at which point it becomes taxable income. This is similar to other retirement plans such as the 401(k) which offer tax-deferral as well. Because annuities are long-term investment vehicles, the account owner may have to pay a 10% IRS penalty if withdrawing money prior to age 59 1/2.

The insurance aspect includes any single or combination of guarantees available from the service provider. There are often additional “riders” that can be purchased to spice up the contract as well. Many annuity providers continuously update the insurance features in an effort to give themselves an advantage over rival service providers. Here is a list of some of the more popular features offered on today’s contracts:

Death Benefit -- This is a standard feature of most variable annuity contracts. The insurance company will make a payment to your spouse or other named beneficiary when you die. The beneficiary will generally receive the greater of either your account balance at the time of death or whatever your initial investment was, less any withdrawals taken. For example, if you invest $100,000 in 2002 which grows to $150,000 before you die, your beneficiary would get $150,000. On the other hand, if the markets had a sour decade and the contract was worth only $75,000 at the time of death, the beneficiary would still get the initial $100,000, assuming they hadn’t taken any withdrawals.

Some service providers offer a “stepped-up” death benefit. This feature, often referred to as a “ratchet,” will allow the contract to be upwardly adjusted every few years to lock in market gains. If the new market value is higher, your death benefit and possibly the income stream derived from it will benefit from the increase. This further entices investors by allowing the guarantee of a higher beneficiary payout, even if the market turns sour the year after the ratchet. Naturally, this sort of benefit will cost you in the form of higher expenses. Certain limits may apply with these sorts of benefits so you’ll want to read the contract carefully.

Guaranteed Minimum Income Benefits (GMIB) -- If you decide to “annuitize” your purchase payments into a stream of income, you’ll have to choose a period of time over which to receive your payout. It can be a fixed number of years, such as ten, or it can be for life. The GMIB guarantees that the annuitant will receive a certain minimum amount of income while alive. The insurance company runs the risk that the account owner could live to a ripe old age, resulting in a possible loss of money on that contract. However, insurance companies are pretty darn smart. They understand that the majority of account owners will die somewhere within the standard mortality tables.

There are a few different flavors which this income guarantee comes in. Sometimes the guarantee is on the accumulation amount. Other times it is on the withdrawal amount. However you phrase it, the objectives are fairly similar. The contract will provide some form of surety regarding the possibility that your account doesn’t grow fast enough to support your payments. The minimum payment is usually either a percentage of the account value or a percentage of the stepped-up account value, regardless of how the underlying investments have performed. The guarantee on withdrawals (GMWB) has been particularly popular because it doesn’t require the account owner to annuitize their funds, giving up a degree of control. The account owner can withdraw a certain percentage of their account each year, usually until the entire value has been taken out.*

The above benefits often work well with investors who are looking for growth combined with income. They can keep a growth-oriented asset allocation and remain confident about a certain minimum guaranteed level of income. Keep in mind that any of these additional guarantees regarding income, withdrawals, or accumulation will cost money. Investors should analyze these costs carefully to determine whether or not they are worth it.

Criticisms of the Variable Annuity

As I’ve mentioned, there are criticisms over the variable annuity. Costs, surrender charges, and tax treatment are among the complaints which are frequently thrown around. There are also mounting concerns about the use of annuities in already tax-qualified plans such as the 401k and 403b. Let’s get into some of these complaints to see whether or not they are legitimate.

Costs -- The costs of an annuity depend in part on which features and riders the annuity owner has selected. That being said, all variable annuities have M&E (mortality and expense) charges, which cover the insurance aspect of the contract. When combined with the expenses of the underlying investments, annuity expenses typically run 2-2.5%, while domestic mutual funds tend to hover around the 1-1.5% level.**

My feeling is that critics are mostly concerned about what, if any value is really added by the features of an annuity. Are the insurance companies protecting consumers from real risks? Or do they simply use scare tactics to promote an investment product which lacks in value? For example, the death benefit is the primary feature of most annuity contracts, yet, once every few months I cross an article which accuses the death benefit of being superfluous. The argument is that the actual number of situations in which a long-term contract invested in stocks and bonds would decrease in value enough that the beneficiary would be better off taking the initial principal investment over the current contract value, is extremely low. If an investor considers the past performance of the markets, this benefit only affects those who purchase an annuity contract and die soon afterwards. However, insurance companies generally put an age-cap on who can buy their contracts, protecting them from extremely old people receiving too many guarantees.

If you really crunch the numbers, it’ll be clear that insurance companies are not in the business of losing money to probability. That being said, they are in the business of providing certainty of income, or “peace-of-mind.” An annuity will usually offer you that, even if a hefty price tag is attached.

We could have similar discussion about the guaranteed minimum income benefits as well, but the point is more or less the same. GMIB could be criticized as primarily a “peace-of-mind” benefit which may not be cost-effective. This criticism would probably come more from a savvy investor or other person who studies probability the same way an actuary does.

Surrender Charges: Annuities, because they are designed to be long-term savings vehicles, often have steep withdrawal penalties. In the first several years of the contract, the owner is usually allowed to withdraw only a small percentage of the contract without penalty. Surrender charges vary but are usually a descending scale from 6 or 7% down to 0% over 5-10 years.

Taxation of Earnings: Annuity benefits took a hit in 2003 when the long-term capital gains rate was reduced from 20% to 15%. Long-term capital gains (held for one year or more) are currently taxed at a maximum of 15%. However, investment earnings on annuities are taxed at the ordinary income bracket, which could be much higher. While the other benefits might still make the annuity worth it, this adds fuel to the arguments of the critics.

Annuities in qualified plans: Annuities also receive an increased level of criticism when offered in qualified plans. The argument is that since 401k and 403b plans already have tax-deferred status, the increased costs of using the variable annuity will reduce the performance of the sub-accounts over longer periods of time. Many think it’s not worth using a variable annuity for this purpose.

In fact, the SEC’s own website highlights the fact that variable annuities offer no additional tax benefit to that of a 401k or IRA plan. They caution that you should only use the variable annuity in a 401k or IRA vehicle if it makes sense because of the annuity's other features, such as lifetime income payments and death benefit protection.

I can sympathize with this criticism as I’ve seen it in real life. My mother participated in a 403b plan while teaching which was offered through a variable annuity platform. She had major problems transferring in and out of sub-accounts because of the surrender charges. She also found that the high costs were holding back the performance of her investments, especially during sideways markets. The problems were compounded by the fact that a low-cost mutual fund platform would have offered the same tax-deferred status at a lower cost. Upon doing some research, we were able to transfer her out and into a lower cost alternative.

The Bottom Line

This is the basic story with annuities. A true do-it-yourself investor could probably manually create a cheaper product by purchasing insurance contracts for the death benefit, and having low-cost investments centered around bonds and dividend-paying stocks for the income stream. Plus, you wouldn’t have to deal with any holding periods or surrender charges. While it may ultimately be cheaper this way, it would require a certain degree of research and knowledge about what you want to sort through the various risks and choices.

Having dealt with the annuity question in my career, I can state that peace-of-mind is often what keeps clients interested in this type of product. I’ve noticed that the media often points to the commission paid to brokers and advisors for the surge in variable annuity sales. While it may be a factor, the decrease in pension benefits and government entitlements is more likely the primary driver in annuity popularity. The comfort and convenience of packaged products is definitely a factor as well. Justifying higher costs in the face of convenience to do-it-yourself investors is near impossible. If you have a good financial planner, especially one who works on a fee-basis, they should be able to explain the attributes of the variable annuity in clear English for you.

This is certainly a lot of information to digest. If you have any questions or comments, please don't hesitate to contact me.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

* Guarantees are based on the claims-paying ability of the issuer. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor's unit, when redeemed, may be worth more or less than their original value. Optional features may involve additional fees.

** According to the Variable Annuity Research and Data Service, 2.148 percent is the average for variable annuity expenses as of March 31, 2006. Average mutual fund expenses are 1.32 percent, based on data as of June 30, 2006, compiled by Morningstar, Inc., of the average expense ratios of domestic equity, taxable bond, municipal bond, and foreign equity mutual funds.

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Posted by Russell Bailyn at 11:37 AM | Permalink | Comments ( 1 ) | TrackBacks ( 0 )

An exchange-traded fund (ETF) is a basket of securities that trades on an exchange like a stock. In the event you don’t know how the stock market works, shares of public companies trade at various prices based on demand. The distinguishing factor with an ETF is that, rather than representing ownership in a single company, it tracks an index such as the S&P 500 or Dow Jones Industrial Average. The price of an ETF, similar to a basket of stocks in a mutual fund, will vary based on the performance of its underlying holdings. If an ETF represents an index with thirty different companies and all of them are trading up on a given day, the offering price of the ETF will move up accordingly.*

A good starting point for better understanding this important and relatively new investment product is to view their advantages against investments which could be utilized by a similar audience. Mutual funds are the investment product most analogous to exchange-traded funds which can be used as a benchmark for comparison. Let’s analyze some of the criticism given to mutual funds and then see how exchange-traded funds stack up.

• Mutual funds tend to be expensive.
• Mutual fund prices are only figured once daily- after the close of the market. If you put in an order for a mutual fund at 9:45 in the morning, you’ll get the 4 pm price.
• An investor cannot short sell or buy options on mutual funds.
• Mutual funds often have steep sales charges.
• Most mutual funds are actively managed.

Keep in mind that, while mutual funds may have certain disadvantages, they are still an extremely popular and important investment vehicle. Part of the value which can be extracted from the earlier chapter on selecting mutual funds is based on both the staggering amount of assets invested in mutual funds in the United States as well as the fact that many retirement plans, such as the 401k, require the use of mutual funds by plan participants. I’m highlighting their criticisms for the purpose of making my ETF discussion as clear as possible. That being said, let’s talk about how exchange-traded funds are different from mutual funds.

Exchange-traded funds are relatively inexpensive. Because ETFs track indexes, the expenses are usually lower than mutual funds. There are several reasons for this. First, they avoid costs associated with hiring portfolio managers and research analysts to help pick securities. Second, transaction costs are typically lower as well. Unlike mutual funds, ETF sponsors do not sell shares directly to the public. They exchange large blocks of shares, known as creation units, for the securities of the companies that comprise their underlying index. In a sense, it is the predictability of the creation units which differs from mutual funds and causes fewer transactions. With a mutual fund, it is near impossible to anticipate who will buy shares and who will redeem shares from day to day. This operational difference also lends itself to certain tax advantages, such as lower rates of capital gain distributions getting transferred to investors.

Exchange-traded funds can be bought or sold throughout the day. Imagine if the market was rapidly declining because of a terrorist threat. An investor could sell his ETF shares early in the morning whereas mutual fund shares could not be liquidated until the end of the day. This advantage is referred to as liquidity.
Some people actually claim this as a disadvantage because it encourages a higher volume of trading in funds that are often intended to be purchased as long-term investments. I don’t think of this as a specific disadvantage of exchange-traded funds- rather a commentary on the impulsive and often emotional nature of many investors. Having a smart financial advisor and self-discipline should help overcome the desires to trade your core portfolio holdings.

The ability to short-sell or trade options on exchange-traded funds. If you’re looking for a potentially inexpensive way to hedge yourself after a recent climb in the markets, short-selling an ETF may provide that possibility. This practice is not possible with open-end mutual funds as they are not securities which can be bought or sold on an exchange. One can also buy or sell options on an ETF the same way they could with a stock. For example, buying a “put” on an ETF which tracks the S&P 500 index might provide some protection against a decline in the overall markets.** Similarly, if it were your belief that the broad market averages were going to perform well in the near future, you could buy a “call” on an ETF which corresponds to the market index which you’d like increased exposure to. To learn more about options strategies and how they may pertain to your portfolio, visit www.cboe.com.

Exchange-traded funds don’t have steep sales charges.*** This advantage depends in many ways on your current compensation arrangement with your broker or advisor. Technically, an ETF is purchased like a stock. An investor pays a commission to a broker for executing the trade. The size of that commission obviously is something which you work out with your broker or advisor, but it’s quite possible that the commission would be lower than an up-front commission on a load mutual fund. For example, a $10,000 purchase of an ETF, similar to a stock, might cost you around 1% ($100) to purchase. This number could be even less if you choose to utilize the services of a discount brokerage firm. Compare that with a standard up-front commission on an equity mutual fund which could run you in the ballpark of 5%, or $500.

Mutual funds are actively managed. The fact that exchange-traded funds try to duplicate an index rather than outperform it could be perceived as either an advantage or disadvantage. The answer reverts back to the popular argument of whether actively managed funds are worth their higher level of expenses. Certain managers are famous for consistently outperforming their peers. If we knew which managers would beat their benchmarks each year, most people wouldn’t bother reading articles about exchange-traded funds. However, statistics show that, over the long run, mutual fund managers usually don’t beat the index which they compare their returns to.**** I consider this an advantage insofar as you’re still getting broad market exposure but potentially paying much less for it.

Why Else Might I Buy an Exchange-Traded Fund?

Another popular use for exchange-traded funds is to gain exposure to specific market sectors. One may do this because of familiarity with a certain slice of the market, or simply to speculate on events which might cause one sector of the market to perform better than others. Just remember when overweighting a specific sector of the market that it could disrupt a mapped out asset allocation.

Because exchange-traded funds have seen such a dramatic increase in fund flows over the past several years, they have started to evolve into quite the trendy product. Originally, ETFs tracked primarily the major market indexes such as the Dow Jones, or Wilshire 5000, and major sectors such as financials, healthcare, and technology. Now, besides the more traditional indexes, ETFs exist for various unique and alternative indexes. There is a clean energy ETF for people looking for a cheap way to gain exposure to the alternative energy market. There is also a currency ETF, leisure ETF, and even one which tracks IPOs (stocks which recently started trading publicly). Granted, it sometimes feels like too many ETFs have been released into the marketplace, but it’s doubtful investors will complain about this as it gives them a wider variety of investment options.

I find the popular reception of ETFs as trading tools to be an intriguing concept. When I first learned about this product, I immediately thought of it as a substitute for mutual funds, as discussed above. With all the people in the world who criticize actively managed mutual funds and advocate the low-cost environment associated with index funds, you’d think ETFs, which are potentially cheaper than index mutual funds, would attract a heavy flow of funds away from mutual funds. Now, this has happened to some extent, but not with the sense of urgency I would have expected. Mutual fund assets in the US currently stand at over $10 trillion, while ETFs are still hovering around $400 billion.

I believe one explanation for this could be how they are marketed--both by the ETF companies and by financial advisors. Many ETFs are based on indexes which are speculative and attract investors with a high tolerance for risk. These are often the same people who enjoy trading stocks. It’s questionable how many of these people are focusing on the costs of their long term investment holdings. If they are, why haven’t they embraced ETFs for that purpose as well?

Also, financial advisors who work on commission tend to make less money selling exchange-traded funds as long-term holdings than they do from selling load mutual funds. Considering the fact that many individual investors learn about new investment products through their advisors, this could certainly slow the passage of information. As we mentioned, those who are actively seeking newer investment products tend to be the investors who focus on short term trading. So basically, we lack a medium through which ordinary investors can learn about the potential cost savings associated with exchange-traded funds. This is one way the blogosphere can really come in handy. It’s a source of free information which can potentially improve your decision-making and make you a better investor.

Questions? Comments? E-mail me

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

* Equity-based ETFs are subject to risks similar to those of stocks; fixed income ETFs are subject to risks similar to those of bonds. Investment returns will fluctuate and are subject to market volatility. Shares may be worth more or less than their original cost when sold. Foreign investments have unique risks, and greater risks than domestic investments. Past performance is no guarantee of future results.

** ETFs can be constructed to represent the holdings found within an index; however, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors. Investors cannot invest directly in an index. Options involve risk and are not suitable for all investors. Carefully consider whether options are appropriate for you in light of your experience, objectives, and other financial circumstances.

*** Depending on the number of trades executed, the cost of the associated commissions may outweight the low expense ratio associated with ETFs compared to mutual funds. As such, in some instances, costs of ETFs may be greater than that of mutual funds.

**** William Sharpe, "The Arithmetic of Active Management," Financial Analysts Journal 47, no. 1 (January/February 1991):7-9

Posted by Russell Bailyn at 04:01 PM | Permalink | Comments ( 3 ) | TrackBacks ( 0 )

Financial Advisor Magazine reported this month an average earnings drop of over 30% this year for financial planners.* Yikes! Why is my industry suffering? Don’t people need the help of skilled advisors now more than ever? My suspicion is that these stats are reflecting changes in the industry rather than a decline in the overall popularity of professional help. In fact, the story confirms that the average lower earnings are reflective of more advisors entering the profession at younger ages, which has the effect of lowering the average earnings figures. What a relief.

According to the story, the average planner had gross earnings of $195,394, down from over $280,000 in the 2006-2007 survey. When viewed another way, a similar pyramid exists each year in which the lowest earners have been in the industry from 0-10 years, the second highest earning group has been in the industry from 11-20 years, and highest earnings group 21-30 years. We learn even more by reading further into these statistics. Most new financial planners are not people aged 20-30. They are people aged 40-60. Rather than entering the industry out of college, financial planners often work elsewhere in the financial services industry and switch into financial advising/asset management when they learn about it through related fields. I can confirm this through my own experience working towards the Certified Financial Planner designation. I was by far the youngest guy in class. Most of these people were financially established, middle-aged men making career switches.

I wonder if the main growth driver in the financial planning industry is the tough economic environment which we’re currently in. Not only are people seeking financial guidance, but the constant release of new investment products forces consumers to make more and more choices which affect their future. It’s hard for me to keep up with all that is new in this industry and I make a point of doing so. The average consumer couldn’t possibly have the time to stay on top of everything. I do like to think that new advisors working towards recognized credentials such as the CFP will ultimately help consumers navigate through the financial maze which we all grapple with. And if the average salary fluctuates a little bit, well, let's just keep our eye on the ball.

As always, feel free to e-mail me with questions or comments.

Russell Bailyn
--
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net

Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

Posted by Russell Bailyn at 03:33 PM | Permalink | Comments ( 2 ) | TrackBacks ( 0 )