Are Mutual Fund Names Misleading?

By
Steve Hartel, MBA, AIF®
March 19, 2018
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In 2001, the Securities and Exchange Commission (SEC) adopted a new rule to supposedly prohibit mutual fund names that may mislead investors about a fund’s investments and risks. The rule required a fund with a name suggesting that the fund focuses on a particular type of investment (e.g., “stocks” or “bonds”) to invest at least 80% of its assets accordingly. Previously, funds were subject to a 65% investment requirement.

This rule resulted in many funds changing their names, changing their investments, or both. In general, things are better now than they were before the 2001 rule. However, today’s mutual fund names and categories can still be confusing and/or misleading.

Blurred Boundaries

For example, let’s look at names that connote where the fund buys its investments. These names usually contain words like “Domestic,” “International,” “Global,” and “World.” Imagine a Domestic Large-Cap fund, whose name suggests it buys large, U.S. companies. But if the fund owns mostly companies in the S&P 500 Index, those companies might be generating up to 50% of their revenues outside of the U.S. The large multinational firm might be based in the U.S. but do business in countries all around the world. The opposite may be true of funds with “Global” or “World” in their name; those companies based in foreign countries may be deriving some or all of their revenue from dealings with the U.S.

Undefined Jargon

Another confusing category of funds is called “smart beta”. Investopedia defines Beta this way1:

“Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns.”

Got that? Let’s assume you totally understand beta and CAPM. So, what is “smart” beta? If beta is a measure of volatility, then a reasonable person might assume that “smart beta” is a more intelligent measure of volatility, right? Let’s see if the definition of smart beta contains the word “volatility.”

Investopedia defines smart beta this way2:

The goal of smart beta is to obtain alpha, lower risk or increase diversification at a cost lower than traditional active management and marginally higher than straight index investing. It seeks the best construction of an optimally diversified portfolio. In effect, smart beta is a combination of efficient-market hypothesis and value investing. Smart beta defines a set of investment strategies that emphasize the use of alternative index construction rules to traditional market capitalization-based indices. Smart beta emphasizes capturing investment factors or market inefficiencies in a rules-based and transparent way. The increased popularity of smart beta is linked to a desire for portfolio risk management and diversification along factor dimensions, as well as seeking to enhance risk-adjusted returns above cap-weighted indices.

Hmm. Not a single mention of volatility. Are you confused yet?

Growth, Aggressive Growth, Capital Appreciation, Equity Income

Growth sounds good, but how is it different from capital appreciation? Don’t they mean the same thing? Does aggressive mean faster, riskier, meaner, or something else? Equity income funds are supposed to be stocks that pay dividends, right? So, what category do you think the Dividend Growth Small & Mid-Cap Fund3 is? It has both “dividend” and “growth” in its name, but are they separate or together? Does the fund invest in companies whose dividends are growing, or does it invest in growth companies that also pay dividends? An investor would need to read the fund’s prospectus to find out for sure. I’m sure all good investors thoroughly read those prospectuses from cover to cover.

Reporting Problem

The SEC requires mutual funds to report complete lists of their holdings on a quarterly basis. So, the manager of the hypothetical Blah-Blah Domestic Large Cap Fund could buy a bunch of foreign small-cap stocks on January 1 and hold them until March 28. Then, the manager could sell them and replace them with domestic large-cap stocks, and report on March 31 that the fund was properly holding domestic large cap stocks as required. On April 1, the manager could buy back the foreign small cap stocks and repeat that process every quarter.

Conclusion

Mutual fund names and categories are more informative than they used to be, but they can still be quite confusing or misleading. Investors (and advisors) need to do their due diligence, fully read those prospectuses, and closely follow the actions of the fund managers. Is your advisor recommending mutual funds? Are they confident of what’s really in those funds? Are you? If you have any questions about the mutual funds in your portfolio, email me at steve.hartel@trilogyfs.com and I if I can’t answer your question, I will find someone who can.

  1. https://www.investopedia.com/terms/b/beta.asp
  2. https://www.investopedia.com/terms/s/smart-beta.asp

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By Trilogy Financial
November 2, 2017

The day you become a parent is a day of overwhelming emotions. You may experience joy at the sight of your precious child, relief that he or she made it out of the womb, and for many of you, fear and anxiety because you somehow have to turn that seven-pound baby into an independent, responsible, and successful adult.

As parents, there are so many things we have to teach our children, beginning with the basics of how to eat and share toys to more complicated lessons such as making decisions and getting along with others. As a society, we are excelling in some areas of parenting, but falling behind in others. In a recent National Financial Capabilities Study, only 24 percent of Millennials (age 23-35) were able to answer the first three financial literacy questions correctly, and a mere 8 percent answered them all correctly.[1]

Most parents agree that we need to do a better job teaching our kids about money. Last year, T Rowe Price reported that 80 percent of parents didn’t think schools were doing enough to teach kids about financial matters.[2]However, parents cannot abdicate all responsibility to the schools. Raising children and teaching them to navigate the world is first and foremost a parent’s responsibility.

Set A Good Financial Example

The first step in teaching your kids about finances is modeling what you want them to learn. Few parents would disagree with this concept. The same T Rowe Price study mentioned above found that 69 percent of parents are very/extremely concerned about setting a good financial example for their kids. The vast majority, eight out of ten, feel that they are setting a good financial example, but two-thirds also admit to doing things that wouldn’t qualify as setting a good example.

An enormous 40 percent admitted that when it comes to talking to their kids about finances, it’s “Do as I say, not as I do.” Anyone who has raised kids knows that isn’t enough. My clients tell me they are very concerned about setting a good example for their children. The first step in teaching your kids about money is simple: Show them.

Talk About Finances

Sometimes a silent model isn’t quite enough, and some areas of personal finance aren’t very visible. That is why it is imperative to talk to your kids about finances. But talking about money may be a long-standing cultural taboo. Often this reluctance to discuss financial matters spills over into the home as well.

Forty-nine percent of the parents in the T Rowe Price study said they rarely or never discuss family finances with their children. Eighteen percent admitted to being very/extremely reluctant to discuss financial matters with their kids and 72 percent of parents experience at least some reluctance to having such a discussion. But how are kids going to learn about money if you avoid talking to them about it?  Some topics require more in-depth discussion and openness and finances are one of them.

Get Your Kids Involved

If you want financial understanding to actually sink in, you need to get your kids involved. Learning theory and research have consistently shown that the more active a learning experience is, the greater the learning gains and retention.[3] Most people have to do something to truly learn it.

How does this work with kids? Here are some ways I’ve put this into practice with my daughter: Even though she is young, I have taught her the difference between a penny, nickel, dime and quarter. Beyond just teaching the values of the coins, I then show her how to earn money by completing basic, age-appropriate chores such as making her bed and folding her clothes. As her coins start adding up, she has the opportunity to buy a toy or to save her money and earn interest (a penny for every dollar). Just as any adult, she loves the idea of making money for no extra work, so she often chooses the savings option!

At this point, I take a step back and let my daughter make her own financial decisions (and sometimes mistakes) so that she can learn from them. She and I have different values and I’ve learned that I need to let her be independent and respect her choices. On one occasion, she decided to impulsively purchase a My Little Pony beanie baby that I thought would be a waste of money. Rather than refusing to buy the toy for her, I took a step back and allowed her to buy it with her own money. Sometimes I am surprised in the process, as she still plays with this toy three months later!

Imparting financial wisdom to your kids is a challenging process that takes years. So, if you don’t feel like you’re doing an adequate job of teaching your kids about money, you’re not alone. Even if you are doing a good job, you probably agree with the 77 percent of the T Rowe Price survey parents who said that they wished there were more resources available to help them teach their kids about financial matters.

I believe that every child can learn critical financial lessons at a young age that will set them up for future success. I want to provide you with the tools to help you on this journey. To set up a meeting, call my office at (949) 221-8105 x 2128, or email me at mike.loo@trilogyfs.com.

[1] http://gflec.org/wp-content/uploads/2015/01/a738b9_b453bb8368e248f1bc546bb257ad0d2e.pdf

[2] https://corporate.troweprice.com/Money-Confident-Kids/images/emk/2015-PKM-Report-2015-FINAL.pdf

[3] http://www.joe.org/joe/1994august/a6.php

By Trilogy Financial
March 8, 2023

Estate planning is an essential step to help protect the wealth that you've spent your life building. Meeting with an estate planner will help to create a comprehensive plan that will allow your assets to effectively pass to your assigned beneficiaries. Creating this initial plan can feel overwhelming, and we are here to help you prepare.

Here are five important questions you can expect to discuss with your estate advisor as you start to plan for your future.

How Would You Like Your Wealth to Pass to Your Heirs or Elsewhere?

The basis of your estate plan is where you want to direct your wealth and how you'd like that to happen. No matter how large or small your estate is, you'll need to decide how it should be distributed among children, grandchildren, other family members or favorite charity organizations. For example, this could mean leaving different parties a percentage of your total assets, or leaving one child your business and another child your vacation home.

It’s important to also think about whether you want your beneficiaries to receive their inheritance all at once or not. If you have a disabled child requiring lifelong care on your list, or someone who needs a little extra help managing their money, you may want a trust or annuity structure in place to pay out the inheritance in increments.

What Can Be Done to Prevent Costs and Conflicts for Your Heirs?

Costs for your beneficiaries are most likely to come up if your estate needs to go through probate, which is the process by which a court distributes your assets. In addition to financial costs, there are other reasons to avoid probate. Probate can be a long and exhausting process – meaning, your heirs will not be able to access your estate right away. If you have dependents who will rely on the money in your estate, this can be an especially serious concern. In addition, probate adds your estate information to the public record, which you may want to avoid. There are several strategies your financial advisor might recommend to avoid probate. These include placing assets in a trust and moving funds into joint accounts with your beneficiaries.

Conflict among heirs is another common concern, especially in families where conflict already exists. While the legal documents included in your estate should help minimize disagreements and make it more difficult for someone to contest your wishes, communication during your lifetime is important as well. Disagreements often surround specific items like jewelry or sentimental pieces rather than your financial assets. Labeling these items, writing a letter of instruction and starting to pass on these things during your lifetime can all help make your intentions clear.

How Can You Reduce Your Tax Burden?

After a lifetime of working to earn your money, you likely want to direct your wealth to your loved ones rather than the government. In 2023, only estates valued at $12.92 million (or $25.84 million for some married couples) or more may be subject to the federal estate tax. If, upon your death, the total value of your estate is less than the applicable exclusion amount, no federal estate taxes will be due.

Depending on the state you live in, your heirs or your estate might also be subject to state estate or inheritance taxes. If taxes are a concern for your estate, there are several ways to reduce your tax burden.

One simple option is to start passing money along during your lifetime. Based on the 2022 gift tax exemption limit, individuals can give up to $16,000 per recipient per year. This lets you give money directly to your children or grandchildren while reducing the value of your estate, which will reduce your tax bill. Other options include a marital trust, which allows one spouse to place assets in trust for the other spouse, and an irrevocable life insurance trust, which can pay for life insurance premiums with tax-deductible funds and then avoid estate taxes later on.

Are You Already Working with Financial Professionals?

If you're already working with an estate attorney, a financial planner or a tax professional, it's important for your estate planner to understand the strategies your existing financial team has recommended. You'll want to make sure that all of these members of your team are working together so you aren't paying for duplicated efforts or conflicting suggestions.

If you aren't already working with a financial team, your estate planner may recommend that you do so depending on the details of your estate plan. If you have complex tax concerns, you might need to talk to a tax expert. Depending on the type of trust that you wish to establish, you may need an estate attorney to set it up.

How Will Changes in Your Life Change Your Estate Plan?

Your estate plan should have the flexibility to adapt to changes in your lifestyle, family structure or life expectancy. Your initial plan will be based on your current circumstances, but you should consider potential future concerns and possible solutions.

Divorce and Remarriage

Divorce and remarriage are common life changes that can affect your estate plan. If you remarry, you may not want your new spouse to manage the inheritance of your children from the first marriage. This can create the need for a new trust to be established. In addition, if you have more children in later marriages, you will again need to update your estate plan.

Life Expectancy and Medical Issues

There are other lifestyle considerations that might change as well. For example, if based on your family history you expect to live into your 90s, you might not want to start giving away assets to avoid estate taxes. And if medical issues arise and your life expectancy changes, you will likely need to adjust your plan.

While you won't need to make any decisions based on hypotheticals, it's a good idea to discuss the possibilities.

How to Get Started?

Your estate plan is a key component of your Life Plan. To create an estate plan that addresses the above questions and any other concerns you may have, you'll need to start by finding the right estate advisor. Talk to the Trilogy Financial team to take control of your finances today while maximizing your future opportunities.

Download your free Estate Strategies eBook to learn how to protect your estate.

 

family happy after meeting with estate planner
family happy with estate planning and secure future

 

Get Started on Your Financial Life Plan Today