Advisory services

Most mutual fund investors are self-directed: They educate themselves through books like this one, personal finance magazines and TV programs, and brochures and prospectuses offered by the fund companies. Then they make their fund selections and monitor the growth of their investments in order to make sure that they perform as expected. One reason for the popularity of mutual funds is that they lend themselves to just this kind of do-it-yourself investing. However, the bigger fund companies do offer free, personalized advisory services to their higher-dollar clients — especially those with assets of $500,000 or more. Most people who give advice are Certified Financial Planners (look for the CFP designation after their names). Their expertise covers asset allocation approaches, investment strategies, and economic and business trends, and they’re qualified to give specific recommendations on funds to consider. They may also talk about the tax implications of your investment.
If you are not (yet) a part of this investment stratosphere, you may be able to gain some of the same advice from a broker, accountant, insurance agent, or other professional. Be sure you understand exactly how your advisor derives his compensation. An advisor who receives a fee directly from you for his services — either in the form of a straight payment or as a percentage of the assets you invest — is likely to give relatively unbiased advice (how knowledgeable or helpful this guidance proves to be is another matter). On the other hand, advisors who receive all or part of their payments in the form of sales commissions may recommend that you buy the investment products from which they stand to benefit personally. A stockbroker may urge you to invest in stocks; an insurance agent may direct you toward insurance company products such as annuities. Before you buy into any sales pitch, carefully consider the source and what he or she has to gain from your investment.

Retirement-related services

Many fund firms offer retirement planning services. You may be able to consult a staff member who is familiar with retirement planning issues by telephone, or you may have access to retirement-planning brochures, worksheets, and other literature through the mail or online.
Typically, the retirement topics covered include the following:

• How to calculate the amount of money you can expect to require for a comfortable and secure retirement
• How much you need to save and invest each month in order to reach your retirement goals
• How your asset allocation should change over time as your investment time horizon and risk tolerance change
• The pros and cons of various kinds of tax-advantaged retirement accounts: IRAs, Roth IRAs, 401(k)s, Keogh plans, and so on
• Options for taking distributions from your retirement account

Social Security plays a role in retirement planning for most Americans. Despite concerns over the long-term viability of the government funding for Social Security, most people can expect to derive at least part of their retirement income from this source.
Your Social Security income will be based largely on how much money you’ve earned (and paid Social Security taxes on) throughout your life. To determine how much you’re probably going to receive from the government after retirement, request Form SSA-7004, the Personal Earnings and Benefit Estimate Statement, from the Social Security Administration, by calling toll-free 1-800-772-1213 or by logging onto their Web site at www.ssa.gov.
When you receive the statement (in four to six weeks), you can develop some perspective on your expected monthly Social Security payments — and how much more retirement income you’ll need to provide through your own savings and investments.

Check-writing

If you own shares in a bond fund, such as a money market fund, you probably have the option of writing checks against the money in your account on special checks from the fund company. (Check-writing is normally not an option with a stock fund.)
Most funds establish a minimum amount for the checks you write (typically $500), and you may have a small per-check charge. Writing a check can be a convenient way of redeeming shares.
When you write a check against a mutual fund, whether to raise some cash or to pay a bill, you are redeeming shares of your investment. Thus, you may be realizing capital gains or other profits, which subjects you to a tax liability at the end of the year. Don’t forget this potential for taxable profit when the time comes to perform your tax calculations.

Automatic investment and reinvestment plans

Most fund families make it easy to set up an automatic investment plan, which is an excellent way for you to develop a consistent practice of saving. When you opt for automatic contributions to an investment account, you can also take advantage of the benefits of dollar cost averaging.
Ask your fund company for information about how to establish an automatic investment plan. You determine the amount that you want to designate — $100, $300, $1,000 — and the sum automatically comes out of your bank account each month and is invested in the fund of your choice. Plan to complete an application form and send in a (voided) check from your bank account.
You can also have the dividends and capital gains income from your funds automatically reinvested, buying you additional shares. I strongly recommend reinvesting, because it allows you to enjoy the benefits of compounding.
Most fund families will allow you to have your dividend and capital gains income reinvested in a different fund, which can be an easy way of diversifying your portfolio. Suppose Jacob has $5,000 invested in an index fund — a conservative, low-cost form of stock investment. He can arrange to have the dividends and capital gains from this fund invested in the fund family’s Aggressive Growth fund. As this amount gradually builds up, the growing investment gives Jacob the opportunity to participate in the profit potential of a more risky and volatile but often lucrative sector of the stock market — without taking any money out of his lower risk index fund investment.

Online information and transactions

With the advent of the Internet, most mutual fund companies now offer the same information online that you receive in your printed account statements. In addition, you can access many other types of data and services online, which relieves much of the time and effort involved in doing research via multiple phone calls, letters, or office visits.
For example, at the Vanguard Web site (www.vanguard.com), you can find such information as

• Historical data on how particular funds have performed
• The largest stock or bond holdings of particular funds
• Specific data about your accounts

Most of the things you do over the phone, you can also do online. For example, you can make investment exchanges between funds, request redemptions, and buy shares.
You can also download application forms and fund prospectuses, plus you can locate other literature on Web sites. Typically, you can access marketing brochures, articles on retirement investing, and speeches by officials at the fund company. With each passing month, fund families are offering more and more interesting online perks. You can look forward to finding retirement calculators, reports on the economy, glossaries of investment terms, mini-courses on investment fundamentals, and other services.
Vanguard, for example, offers WebTurboTax tax-return software free to its online shareholders. Many fund Web sites feature message boards and chat rooms where you can share information and questions with other investors or with the company guru who can respond to your inquiries. The Resource Center at the back of this book lists some of the more useful mutual fund Web sites, including those sponsored by fund companies and those established by independent companies or organizations.

24-hour phone lines

You don’t need to wait for a quarterly statement to get answers about your mutual fund account. Today, most fund families make information about your account as near as your telephone.
Some major fund families offer 24-hour phone lines staffed by real human beings — a welcome convenience for the millions of investors who find themselves living such busy lives that the only time they have to check their investments may be at 11:00 on a Wednesday night or 8:30 Sunday morning. Other fund families have phone lines with live representatives only during business hours; however, they usually provide a 24-hour automated response phone system that gives you access to your account balance and the current NAV of your shares and enables you to make exchanges between funds simply by using your telephone keypad. Your own coded personal identification number (PIN) protects your privacy, so only you can access the account.
On occasion, you may need to open a mutual fund account in a hurry. For example, you may want to make a qualifying IRA deposit on April 15 so that you meet the annual deadline for saving on your taxes.
Many mutual fund companies are willing to let you open an account and make a deposit by phone, even without a completed application on file, provided you submit the application soon thereafter. Call the fund of your choice, explain the situation, and provide the information the company requests, including the number of your bank account where the necessary investment money is on deposit. Then have your bank wire the money to the fund.

Why most fund investors are dissatisfied with their account statements?

Dalbar says that most fund investors are dissatisfied with their account statements for several basic reasons:

• The statement provides too much information. Although investors need complete data on their accounts, a fine line exists between comprehensiveness and overkill. When too much information appears on the account statement, an investor may feel overwhelmed. Fund companies are beginning to refine and improve their presentation of information by selectively eliminating less-useful data and by making the data they retain easier to read through intelligent design and use of graphics. For example, many funds now show an investor’s current asset allocation percentages using a pie chart rather than simply listing a set of numbers.
• The report requires investors to translate tricky mathematical terminology. For example, some fund companies provide statistics like “average cost per share” (a number that may be useful when calculating the taxes due on mutual fund shares you’ve sold), but they don’t describe how it was derived. This lack of information forces you to figure it out yourself. The best account statements explain the source and meaning of every number presented.
• The statement overestimates the investor’s knowledge. Fund companies often use language that the typical investor doesn’t understand. The best account statements include a brief glossary with definitions of technical terms.

When you invest in a new fund, study the first account statement carefully. Make sure that you understand every piece of data it includes. If you don’t, call the fund company’s information line and ask the representative to walk you through the statement, number by number. Jot down notes as you go. And don’t be afraid to ask “silly questions”! Having read this blog, you know more than the average investor, so your questions are probably not foolish at all. After all, your money is at stake here — you deserve to know exactly what it’s doing.