Broker Check

July 15, 1999

To Pay or Not To Pay Do Investors Get Their Money’s Worth

          Are mutual  fund  fees too  high, too low, or too  confusing?   What are investors getting in return?  Such  issues have been camouflaged by the prolonged bull market that has brought shareholders in equity funds hefty annual returns of 20 percent or more,  making commissions and  other  charges  seem a small price to pay.

          But, paying, say a 5 percent commission on a more typical annual return of 8 to 10 percent is a different story. This is an important point to consider right now amid signs that the market is cooling.

          Besides performance, the guidance or advice that theoretically comes  with paying a commission or fee is also growing in importance, as investors,  especially those planning for retirement, seek as much advice as they can get.

          Roughly one third of the mutual funds sold in the United States are no-load vehicles,  sold directly to investors by companies with  no front or back end sales commissions.

          On the load side, where funds are sold  through  brokers and  financial advisors, the rule of thumb is, as follows:

A, or front load shares are typically the least costly way to own a fund, provided the investment is long-term;

B, or back load shares are more likely to fit a five to seven year time frame; however, investors will incur the back load sales charge if shares are redeemed before early

C, or level load shares are typically appropriate for short term investors 

          Other investors take their business  to fee  only advisors  who  recommend portfolios  of  no-load funds  often  with  other financial planning  advice.   These advisors are paid not by a fund company, but by the client.   Typically,  the  fee is equivalent to a percentage of the client’s assets (usually 1%-2%).

          However, it is a certainty that do-it-yourselfers who buy  no load funds  do not get any advice from no load fund companies.

          Not surprisingly, the array of options has left many investors at a loss  as  to whom they should pay, how they should pay, and for what.

          The  need  for  advice  comes  as  growing   numbers  of  investors   fund themselves dealing with ever-larger sums of  money as a  result  of the  U.S. bull market which has produced substantial nest eggs accumulated in company pension plans and elsewhere. It is not uncommon for financial neophytes  to  suddenly  find themselves with six figure rollovers from a pension plan that they must now manage themselves for retirement.   Even  people who  are  investing  on-line tend to start asking questions once their assets get to a  certain critical level.   It’s  one  thing  to play with $10,000 to $50,000, but when they now have $250,000 or $500,000 to invest, there is a need to think twice.

          When  individuals  have a  substantial amount to  invest,  they  need   the handholding that keeps them from jumping off the deep  end  during market turmoil and selling investments that may only be down temporarily.  It happened in  1987 and again in the early 1990s, as well as last summer.  Studies show that individuals who had an advisor and paid  for that advice in some  way,  either front,  back or fee-only, tended not  to overreact to   the  same  degree  that do-it-yourselfers  did. Many clients just call to get a reassuring voice in such times. They may also be the same clients who want to get more aggressive in the headier times.

          If you have any questions about what to do with your portfolio, call Howard Lisch who is a registered representative and financial advisor and he can  properly advise you.

Tax Law Slightly Favors Leasing Your Next Business Car

          We are often asked the question whether it is better to lease or to buy  so I am finally going to put my advice in writing.

          Are you in the market for a new car for your business? Leasing  can deliver bigger tax benefits. Whether you buy or lease, you write  off  operating  expenses-including gas, oil, garage rent, license fees and insurance. The big difference comes in dealing with the cost of the car.  When you buy, you depreciate that cost over a number of  years  and  deduct the interest  on your  loan.   When you lease,  you currently deduct your monthly payments (or a  percentage of them if  you use the car for personal driving too).

          Leasing usually pulls ahead because it’s not  hit  as hard  by the  so-called luxury-car rule that restricts depreciation deductions for cars  that  cost more  than $15,800. Without that limit, for example, the buyer of a $44,000 Cadillac last year could  claim  $8,800  in depreciation on the 1998  tax  return.   The l uxury car rule caps the write-off at $3,160,  costing the business $5,460 in deductions.   The rule applies to leased cars too but not as harshly.   If you  leased  that  Caddy, for example, your deduction would be cut by just  $227.   (The reduction is based  on the cost of the car you lease and  increases each year of the lease.)   Be  sure  to factor tax benefits into your next lease-or-buy decision.

lisch.com

          This is our new website that is still under construction.  But please  note our new e-mail address is [email protected].  Use this instead of [email protected] If you have questions about these or any other tax or finncial matters, please call me.