American Funds Losing Ground To Education
A few years ago, a representative from a large international school in Asia asked me about a couple of specific investment fund sales providers.
Her teachers didn’t have pensions, and she was trying to choose a primary advisor for her school—whereby payroll deductions would be directed. One of the salespeople they were considering as their official school investment “supplier” was a representative from the American Funds company.
As far as fund companies go, you can do a lot worse.
But if this company isn’t at the top of the investment performance list, why do advisors sell them so enthusiastically to clients?
Advisors love these funds, of course, because selling them can rival a license to print money.
My colleagues at Singapore American School had, at one time, millions of trusted dollars wrapped up in American Funds. Fortunately, that number is declining. The saleswoman offering them reaped 5.75 percent of every penny that was added to each respective investor’s pot. That’s why the funds were better for her than they were for my colleagues. If someone pays a salesperson a 5.75 percent fee, then the money that was invested for that year has to make 6.1 percent just to break even.
Yeah, talk about pulling a scab off early.
When approached by the international school that considered the American Funds rep, I suggested that they barter the fees downward. I never heard back from them. To be honest, I don’t even know if such a bartering process is possible. For the financial productivity of the teachers involved, however, I felt that the fee needed to be lowered or eliminated.
Fortunately, more Americans are catching on.
Investors actually withdrew $82 billion from the American Funds company in 2011. In fact, no other fund company had redemptions that came close to that.
Many of those former American Fund investors fled to the Vanguard company of funds where they can enjoy lower fees, no sales commissions, lower investment taxes and better long term performance. Investors added $44 billion to Vanguard in 2011.
Assetbuilder, another low cost investment provider, also gained ground last year.
And advisors like Robert Wasilewski (President of RW Investment Strategies) increased their investment assets. If the average American Fund salesperson saw what Wasilewski charges, they would hide their pink heads under the covers of shame. He charges less and makes more money for his clients, with his passive indexed strategies.
According to the fund tracking company, Morningstar, all of the American Fund bond mutual funds have underperformed the bond indexes on an average trailing five-year period. Forty-two percent have underperformed for the past three years and 93 percent the past year. Sadly, adding Tabasco sauce to the cold sore, investors paid sales commissions to get into those funds.
American Fund’s stock market funds haven’t done a lot better, with 72 percent of their funds trailing their benchmark indexes over the past year.
I believe that the firm’s investor loyalty is on the decline because investors are getting educated. They’re learning that they don’t have to pay steep sales fees that generate huge profits for other people.
As a teacher, my heart warms to that educational notion.
You can read more about the American Fund declines from Jessica Toonkel’s Reuters article.
And you can read more about low cost investing in my book, Millionaire Teacher.