Whatever your wealth journey has been, whether you’ve enjoyed strong year-over-year compounding or found yourself wondering if your nest egg will ever grow to a comfortable number, your mutual fund salesperson has done just fine, thank you. In this blog, we’ll provide four crucial questions you can ask your rep, but we’ll go one better: we’ll give you the answers you would really want to hear.

Four Questions Your Mutual Fund Salesperson Does Not Want You to Ask

Question #1

At the end of 2022, The New York Times published an article that showed that “No actively managed stock or bond funds outperformed the market convincingly and regularly over the last five years.” So my question is: Why would I want to buy a mutual fund when index funds, which by definition always provide market returns, are so much cheaper?

The answer you get may include: something about Morningstar star ratings…something about the great skill and reputation of the fund manager or managers..there is some trend or other that manager really understands….you get breakpoints for investing more!

The answer you want: “There is nothing a mutual fund can do for you that an ETF can’t do for less money, more tax efficiency, less non-systematic risk, or more transparency. So I have come to realize that we should carefully transfer your assets from mutual funds to ETFs, and I’m personally changing from a commission salesperson to a fiduciary advisor.”

Question #2

According to Investopedia, a good expense ratio for a mutual fund is one-half to three-quarters of one percent. But I know there are high-quality ETFs from global firms whose expense ratios are one-twentieth of one percent. What exactly does the mutual fund do for me to earn a fee that’s more than 10 times higher?

The answer you get may include: “It’s not what you spend, it’s what you make…these managers are super-primo experts…you get what you pay for…sixty-five basis points is a deal for this kind of pedigree…would I ever steer you wrong?”

The answer you want: “Americans have invested over $20 trillion into mutual funds, which means that they send hundreds of billions of dollars to these fund complexes every year. You could think of it as the largest transfer of wealth in world history—from American families to mutual fund firms. Yet credible consulting firms have demonstrated that the average American fund investor badly underperforms the market indexes. Because I care about you and your family, I’m recommending you move to an ETF strategy.”

Question #3

I’m told that brokers like you, who sell mutual funds, need to make sure that the funds they recommend meet something called “the suitability standard.” Can you explain to me how that differs from the fiduciary standard?

The answer you get may include: “I would never steer you wrong!…your family means the world to me…we talked about how you wanted to save for retirement, right?…I only recommend 4-star or higher funds…I always think of you first before I sell you anything….”

The answer you want: “I love an educated client, and I’m glad you’ve asked me about this. My firm sells things for commissions under certain circumstances, but we also provide advice for a fee. I recommend you switch to a fee-based relationship, where my only concern, the only basis of any recommendation I would make, is your family’s best interests.”

Question #4

Can you tell me what the maximum downside risk of my mutual funds is? If we had another 2007 type of market, how much might I lose in my mutual fund portfolio?

The answer you get may include: “Our chief investment officer is forecasting a robust election year market…The managers we recommend are really nimble…the cash the manager keeps on hand should give you some protection…our guy was only down 45% in 2007….”

The answer you want: “The simple truth is we just cannot know what a mutual fund manager is doing, except four times a year, and then only for a moment in time that may no longer be operative. Mutual funds are opaque by law, and they commingle tax liabilities with all owners of the fund, and you probably have never read the prospectus. So why don’t we stop exposing you to all these hidden and unknown risks, and put you into a transparent, tax efficient, low cost portfolio you can live with through the market’s ups and downs?”