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.