A Deeper Look At Alpha

So what is Alpha and how does it relate to your portfolio’s performance? As an investor these are very important questions to ask so let’s explore the concept together. In " A Deeper Look At Alpha" written for Investopedia.com I discuss what it is, what it measures, and what you should know about it.

Link:

http://www.investopedia.com/articles/financial-theory/08/deeper-look-at-alpha.asp

The Ultimate Gift

Money—it’s such a simple, yet potent word that can invoke many different emotions, thoughts, fears and dreams in so many people. We all seem to want it, but most of us for different reasons. For some it’s the means to a better life or survival, for others it’s about power, control, vanity….or simply having things.

I’ve never given much thought to the meaning behind it all—the meaning of money, until I stumbled upon “The Ultimate Gift”. This inspiring movie, based on the book with the same name (by Jim Stovall), reminded me of how easily money can corrupt our perspectives about what’s important, and what is real.

Why do we work as hard as we do? What does all this money do for us? What is it all for?

Ironically, my entire professional life is centered on money, taking care of it for others, making sure that it’s saved, it grows, that it lasts, and that it protects the people that have entrusted me with it, people that have worked so hard for it and others who maybe didn’t. I live and breathe money every day—in my client planning, their investments, savings, budgeting…..money…..it’s everywhere…. in its tangible form. But, what exactly does money mean?

What exactly does money mean to you?

Money is blind, and money blinds. It is a ticket to freedom, for others a sentence in darkness. Some obsess about it, a few loathe it, and yet others cannot ever seem to attract it. I’ve seen money corrupt the most decent of people, rip families apart and poison minds and hearts. But, I’ve also seen money enable dreams, save lives and nourish the existence of those who need it most. Money is meant to be shared, not hoarded, help not hurt.

Every day, we should remind ourselves of our purpose in life, revisit our dreams and face our deepest fears. Life is a journey, it’s our shared existence and every experience, good or bad, painful or happy teaches us something. Every moment is really, an ultimate gift….and money, no matter how much or how little we may have, is merely the means to end--nothing more.

Pigs Get Slaughtered....and Investors Pay the Price

Just when you think Wall Street couldn't get any greedier....last Friday UBS became the third major firm in a week to agree to buy back auction rate securities, in an effort to save its skin from allegations of wrongdoing over its sales of the product. Merrill Lynch and Citigroup were already in the hot seat. Collectively, the three firms have committed to taking back a total of more than $36 BILLION of the instruments.

Auction rate securities were a popular form of debt in recent years, often linked to municipalities and student loan organizations that borrowed for the long term but at much lower short term rates, rates which were often reset at periodic auctions.

So, what's the problem and where are the pigs? Regulators and prosecutors investigating the auction rate debacle have uncovered several types of abuses in the auction rate market, including the allegation that the brokers that sold the instruments secretly propped up failed autions. To quote the Wall Street Journal article from August 9th:

"Interest rates were supposed to be reset by weekly or monthly auctions, at which investors could cash out if they wanted to. Until the market collapsed in February, investors got the impression there was heavy demand for the securities because the auctions went off without a hitch. They weren't told how often Wall Street dealers stepped in to support the auctions with their own bids".

Wait...it gets better....

(quoting the same article) "Another allegation by regulators is that some brokers misled investors on the safety of the securities.Customers often were told that the securities, which had higher interest rates than rock-solid certificates of deposit, were just as safe and easily sold. They weren't told that the auctions could fail and leave them without the ability to sell."

To add insult to injury, when the market started to unravel earlier this year, Citigroup and other brokers pumped up the commission splits so they could get rid of the securiteis and dumped them on unsuspecting investors instead. Regulators say brokers were paid unusually rich commissions to sell the securities. In some cases, they say, brokers received high commissions for a product that appeared to offer high returns but held hidden risks.

What a pig fest!! Now it's their turn to pay.

Understanding Mutual Funds Share Classes and Their Costs

by Karla Arguello, MBA

To the unsuspecting investor, all mutual funds might look the same. In fact they are not. With over 25,000 mutual funds now available in the marketplace, it’s important to understand how one fund might vary from its peers. Mutual funds come in all shapes and sizes and often represent distinct categories of the market. This article will focus on the differences in cost structure from fund to fund, and their impact on you, the investor.

Before we jump into this discussion, it’s important to note how many financial advisors get paid. Brokers are often paid by commissions (front end, back end or some blend of both) plus trailing commissions. Brokers can also claim future commissions on any new dollars deposited to the funds, whether or not the broker actually had a direct hand in the process. Certain mutual fund companies either pay the brokers a direct commission, or they recoup these “marketing” expenses from the shareholders by inflating their annual expense ratio.

By way of background, every mutual fund has annual operating expenses. Fund operating expenses vary widely depending on the type of fund. The largest component of operating expense is the fee paid to a fund's investment manager/advisor. Other costs include recordkeeping, custodial services, taxes, legal expenses, and accounting/ auditing fees. Some funds have a marketing cost referred to as a 12b-1 fee, which would also be included in operating expenses. Monitoring the costs of the underlying investments within the portfolio is critical to your financial success. The higher the expense of the fund, the less profit you keep, and so these fees should be controlled by the investor.

Investors can buy mutual funds with distinct “share classes”, many of which contain sales loads. Savvy investors should only consider funds without sales loads, by buying “no-load” funds, often available by buying them directly from the fund company or at a discount broker (ie. Schwab, e-Trade, etc.). Let’s find out what these share classes mean:

A- A class shares typically require upfront commissions, usually between 1% and 5%, commonly referred to as a “sales-load.” These shares generally have the smallest annual expense ratio, but tend to have temporary 12b-1 fees (or marketing expenses) embedded in the cost.

B- B class shares commonly carry contingent deferred sales charges (CDSC), also called “back-end loads,” payable on the sale of the shares. B class shares generally have higher expense ratios than A shares. On top of paying higher yearly expenses, 12b-1 fees are also present. After an initial investment period, usually between 5 to 8 years, B shares customarily convert to A shares.

C-C class shares, like B shares, generally charge a 1% 12b-1 marketing fee and have higher expense ratios. While there are no up-front and back-end fees, C shares ultimately may be the most expensive for many investors because 12b-1 fees are subtracted each year,for as long as the investor owns the shares.

F-F shares are similar to A shares, but with an asset-based fee, usually 1% to 1.5%, directly billed to investors by financial advisors.

I-I shares, often called “institutional shares,” are usually sold to a broker’s largest customers and are sold without upfront loads, CDSC or 12b-1 fees. They carry expense ratios similar to A shares. These are often your best bet, but require big deposits or access through advisors.

R-R shares, often called “retirement shares,” are similar to I shares, but add additional payments to financial advisors and record-keepers into the expense ratio. These are typically found in corporate retirement plans.

When it comes to investing in funds, costs matter. If you're buying a mutual fund using a full-service broker's advice, there's high probability that you've just bought a fund with high costs and commissions. So, before your take the plunge either as it “do-it-yourself” investor or as the client of an “advisor”, do your homework. You can find the expense ratios and loads of mutual funds at websites such as Morningstar's. For more in depth information on the various types of advisor compensation, read here.