A shares, Z shares, R shares, B shares… A degree in cryptography might seem necessary to crack the code of mutual fund share classes.

There are roughly two dozen classes available; however, I’ll spare you the headache and provide a brief rundown of the most noteworthy.

Taking a quick step back, a mutual fund is an investment vehicle that pools together monies from multiple shareholders to purchase securities, typically stocks or bonds. Shareholders receive benefits in the form of diversification, exposure, professional management and technological resources. The value afforded by utilizing mutual funds within one’s portfolio is deserving of its own blog post.

Within this overview, I will isolate pertinent details of the most commonly used (and often-times, detrimental) share classes in the marketplace. The mutual fund share classes you may hold in your portfolio can be problematic without an awareness of the cost implications.

The most commonly used (and potentially harmful) mutual fund share classes

Class A

• Class A shares typically contain what is called a front-end sales load
• This is a commission that is charged when you purchase shares and commonly ranges from 4.75% to 5.75% of the purchase amount
• The following illustrates how the front-load fee is paid: You contribute $5,500 to your Roth IRA and invest the entire amount with a front-end load of 5.75% ($316), only $5,184 of your $5,500 contribution will be invested

Class B

• Class B shares commonly employ a back-end load
• A back-end load is a commission for selling your shares within a certain time frame (usually up to 7 years) and can be as high as 5.00%
• Back-end loads are designed to encourage a longer-term investment in the fund, and typically decrease over time, oftentimes reducing to zero if the specified term is reached
• For example, if you had invested $5,000 in a class B fund and sold it later that year when the value reached $5,500, with a back-end load of 5.00% ($275) you would receive $5,225

Class C

• Class C shares typically enforce a back-end load of around 1.00% if you sell your fund within one year of the initial purchase
• Following our example above, when you sold your shares valued at $5,500 you would receive $5,445

The lowest cost mutual fund share-classes

Class R

• Class R shares do not contain a front-end load or a back-end load, but are typically only available in retirement plans such as a 401(k) plan

Class Z

• Similar to Class R shares, Class Z share do not contain a front-end load or a back-end load
• Z shares are typically available only to employees of a mutual fund company, and are offered as part of their compensation package

Class I

• Also known as Institutional shares or Class Y shares, Class I shares do not contain a front-end load or a back-end load
• Class I shares are generally only available to institutional investors and typically contain the lowest cost of any share class
• In order to purchase Class I shares, a mutual fund company may require a minimum purchase amount of $25,000 or even greater

As part of our independent investment philosophy as well as our fiduciary responsibility, we research and identify the lowest cost share class vehicles for our clients, many of which are generally not available below large investment amounts. As we are not affiliated with any mutual fund company, we continuously evaluate the value-add for each mutual fund manager we include in our clients’ portfolios. Without proper oversight or understanding, over time, the unnecessary costs from using non-institutional, commission-based share classes compound and can erode your wealth.

Disclaimer

Have you ever gotten a call from a bot trying to sell you something?

Have you received enough spam calls that you decided to stop answering calls from unknown numbers, or perhaps, you’ve unleashed a torrent of obscenities in response to that gratingly familiar, automated “Hello!”

The answer is likely “Yes” to all three questions as scam calls (illegal, spoofed calls or texts with artificial voices or prerecorded messages) in the U.S. spiked to over 30 billion occurrences last year. It feels downright harassing when your concentration or relaxation is interrupted by a sales call, especially when it’s in the middle of the night! The worst part is that roughly 25% of these calls result in monetary or identity fraud with losses of over $400 per victim recorded in 2017.

It’s an ongoing issue and the solution is anything but straightforward, particularly when you consider that there are bot calls you don’t want to block, like appointment reminders from your doctor’s office.

However, after receiving 30 unwanted calls in one day earlier this summer, I conducted some research, and found the following tips and recommendations from the Federal Communications Commission (FCC), Federal Trade Commission (FTC) and Internal Revenue Service (IRS).

Tips for stopping those potentially dangerous, unwanted calls and texts

• Place all your phone numbers (cellular and landlines) on the Federal Do Not Call Registry
• You may register online or by calling 1-888-382-1222 – it typically takes one minute to register.
• After registering, telemarketers are mandated to stop calling you within 31 days
• It’s worth noting that the registry does not prevent calls from charitable or political organizations

Block unwanted numbers

• This may be a bit of a chore, but if you have repeat offenders, it will be well-worth your time
• For iPhones and Android phones, just scroll through your recent calls and select which numbers to “block” or to report as “scam”

Place your phone in Do Not Disturb mode

• Do Not Disturb will turn off alerts and notifications coming in to your phone for calls and texts and can be especially beneficial at night as it will prevent you from being woken up
• You can identify contacts as Emergency Bypass contacts, so you will get alerts when calls or texts from them come through
• Do Not Disturb is highly customizable – check your settings for a full range of options

Contact your phone carrier to see what services they offer to prevent scam calls

• AT&T and T-Mobile offer free scam ID and scam block services, as well as enhanced call blocking services for less than $5 per month
• Sprint and Verizon offer a premium caller ID service for $3 per month

Add a third-party app like robokiller to your cell phone to further reduce unwanted calls and texts

• It is important to note that iPhone users receive approximately 30% more unwanted calls than Android phone users, primarily because the iPhone operating system makes it more difficult for some spam apps to fully function

What should I do if I receive a call from an unwanted number?

First, to make recognizing a spam call easier, here are some commonly employed red flags:

• “You’ve been specifically selected for this offer…”
• “We’re giving away a free vacation…”
• “This is an urgent message regarding your account, you must contact us immediately…”
• “We’ve identified a problem with your computer and would like to fix the issue for free…”

Try not say anything if you suspect a bot or scammer has called you

• According to the FCC, even saying “yes” or “hello” may identify you as a “hot” target and cause you to be added to more lists (like an active lead)
• Try not to follow any instructions, even “Hit pound to be removed for our call list” because that call to action is most likely social engineering
• Your best bet is to say nothing, hang up and block the number

An important reminder – never provide your personal information

• A scammer will pressure you to confirm personal data points like a portion of your Social Security number, your password, account number or your mother’s maiden name
• A scammer can easily alter the caller ID to make it look like the call is coming from a familiar company or from a local area code
• If you believe the caller may be legitimate, hang up and call the company directly to verify its authenticity

If you’re sure the call was spam, file a complaint with the FCC

• While the commission will not necessarily put an immediate end to your scam calls, filing a complaint is encouraged as it helps to place the scam callers on their radar
• You may file a complaint with the FTC online or by calling 1-877-FTC-HELP

As we’ve mentioned in previous cybersecurity articles, the criminals are getting more sophisticated every day. The best thing we can do to protect ourselves is to take advantage of the protections available, be on the alert for their tactics and to not take the bait when a call gets through.

Disclaimer

Inflation is coming, which sounds eerily similar to House Stark’s refrain in my favorite show, Game of Thrones, that “Winter is Coming”. In many ways, it’s a reasonable metaphor. 

Inflation is a topic that has caused many individual’s eyes to glaze over in recent times, which isn’t surprising considering nearly half the current U.S. population was not even born when inflation skyrocketed to 14% in the 1970s. Learning what inflation means and experiencing how impactful it can be for their financial well-being will be a first for many Americans.

Inflation is now coming back for a variety of reasons. Whether you endured the Great Inflation in the 1970s or if you are just learning about it now, its significance should not be overlooked. Complacency may leave you unexpectedly exposed to significant negative implications.

What is inflation risk and how does it affect me?

Simply put, inflation means that a good or a service costs more today than it used to in the past.

Remember when the yearly average price at the pump was below $1.00? The year was 1988, and it cost roughly $0.90 per gallon (the average Super Bowl advertisement at the time was $645,000, compared to $5 million this past February). Today, the national average for regular unleaded is $2.83. Of course, there are many forces at work that have influenced the price of gasoline, and Super Bowl advertisements for that matter. The takeaway is that accelerating inflation means higher prices for everyday goods and services. Think of gasoline, groceries, medicine, child care and college tuition to name a few. The risk of inflation is that growth of your personal income and retirement benefits may not be keeping up with the accelerating pace of rising prices. In today’s inflationary environment, you are already losing money in your wallet for approximately half of the items that compose the typical U.S. consumer’s budget (according to the Bureau of Labor Statistics – BLS).

For example, the cost-of-living adjustment (COLA; helps to offset inflation) for Social Security benefit recipients is not expected to keep pace with the projected price increases this year for many goods and services. The 2018 Social Security COLA is +2.0%, which compares unfavorably to the BLS’ 2018 forecast of +11.1% for gasoline and +4.3% for airfare. The average college tuition and fees have increased by +8.0% over the past five years, while long-term care costs grew by +4.5% in 2017. According to the National Association of State Retirement Administrators, many state sponsored pension plans have reduced COLA benefits for newly-hired employees since the 2008/2009 Financial Crisis and over 25% of current plans do not even provide a COLA. Savings accounts provide little help, with the most common before-tax interest rate paid sitting at less than 0.1%.

While you may not “feel” the dynamics of inflation on a daily basis (picture cringing at the thought of “surge pricing” from a ridesharing provider like Uber or Lyft), over time, the compounding nature of inflation can erode your wealth. Let’s say you are 30 years away from retirement, and you estimate you’ll need $1.0 million to comfortably support your lifestyle needs. Assuming annual inflation of +2.5% (similar to this year’s forecast), you’ll actually need approximately $2.1 million in 30 years to equal what $1 million is worth today.  That is the real-life impact of inflation.

Why is inflation forecasted to pick up?

Looking forward, inflation, as measured by the Consumer Price Index (CPI), is expected to accelerate from low levels now to +2.4% by year-end. Headline inflation is forecasted to pick up this year for a multitude of reasons. The growth outlook for the U.S. economy remains solid (more growth equates to more consumer spending, and higher prices), trade policies may weigh on imports (implies higher prices), and the recent corporate income tax reform could spur business spending activity.

Your personal inflation gauge may be higher or lower than the headline rate, depending on your lifestyle and spending needs. For example, if you enjoy cooking at home, your food cost inflation will be approximately +0.4% this year, compared to +2.5% if you prefer to go out to eat more often. On a more granular level, if you bought cakes and cupcakes in March, you likely experienced inflation of +0.7%, whereas if you bought cookies, you benefited, as cookie prices generally dropped by -0.8%. The point is, inflation is relative.

What can I do to protect myself?

Depending upon your unique spending habits, which our planning group prudently analyzes for our clients, a thoughtful investment approach to combat inflation erosion may make sense for you. By reviewing cash flow and spending within the context of a client’s short-term needs and long-term financial goals, we can employ investment strategies specifically designed to protect each of our clients’ wealth from the negative effects of inflation.

Disclaimer

Year-end is a natural time for investors to review their portfolio’s performance.

And while it’s a good idea to check in on your portfolio, it is a crucial mistake for mutual fund shareholders to ignore the potential tax impact of year-end capital gains distributions. Returns without an awareness of the tax implications can be problematic on a number of fronts.

What are mutual funds and why do they pay out capital gains distributions?

A mutual fund is an investment vehicle that pools together monies from multiple shareholders to purchase securities, typically stocks or bonds. Shareholders receive benefits such as diversification, as the fund will hold many securities for which it would be unrealistic for an individual to conduct due diligence on, professional expertise, provided by the fund’s managers, and technological resources, leveraged by the fund’s technicians. Shareholders also benefit by having a team of analysts reviewing and rebalancing their portfolio, in order to keep the fund in line with its stated goals, and from the liquidity which mutual funds afford.

Throughout the year, mutual funds will make buys and sells to ensure that their strategy remains in line with their stated objectives, and to take advantage of any market dislocations. Depending on how long these assets were held by the mutual fund, profitable trades may fall into one of two taxable categories, short-term and long-term capital gains. Short-term is applicable for investments held for less than one year, and is generally taxed as ordinary income, while long-term applies to positions held for longer than one year, and is taxed at the long-term capital gains rate. Mutual funds are mandated by law to distribute at least 98% of their net capital gains (after “netting” out trades with losses and gains) to shareholders once per year; typically, mutual fund distributions are paid out in November or December. The distribution that you receive will be dispersed automatically by the mutual fund, and may consist of both short-term and long-term capital gains. Because mutual funds may execute hundreds or thousands of trades each year, estimating your resulting tax liability can be quite challenging, but failure to do so can leave you susceptible to significantly underestimating what you owe in April, and can even result in moving you into another tax bracket.

Mutual funds are a practical part of my investment allocation and I am sensitive to paying more than I should in income taxes; how should I navigate capital gains distributions?

First, consider the location of the mutual fund holding.  If the fund is held within a qualified account, such as an IRA, there would be no income tax bill from a distribution. Within a taxable account (such as a trust, or a joint or individually held investment account), an investor should avoid buying the fund prior to the distribution date. It is also important to weigh the difference in taxes between selling the fund prior to the distribution date or holding onto the fund and taking the distribution.

Mutual funds typically post estimates for year-end capital gain distributions and pay out dates in November or December. The extent to which your advisor monitors these distributions can vary considerably – ranging from an investment advisor, who may execute your trades dutifully, but leave all of the planning elements to you, to a wealth management firm who may monitor and evaluate distributions, but only those they deem significant. Our Investment Management process includes evaluating all mutual fund distributions, no matter the size.  And for each client we serve, we monitor, review and estimate the tax implications from all such distributions. This allows us to make investment trades throughout the year to minimize the tax bill, and to more efficiently rebalance and align each client’s portfolio to support their unique goals.

In 2016, U.S. stock mutual funds paid out nearly $200 billion in capital gains distributions, according to the Investment Company Institute.  By our measurements, 2017 capital gains distributions will be nearly as significant, driven in part by recent stock market appreciation.  Without properly estimating the tax implications, mutual fund distributions can represent lost opportunities to offset losses or execute carryforwards, and in some circumstances, can leave an investor wide open for headaches come April.

In our opinion, year-end is an occasion best spent with family. And as a matter of course, we monitor the tax implications of capital gains distributions for each of our clients, to simplify the complexities of their wealth, and to give them back the most precious commodity of all: time.

Disclaimer

The U.S. presidential debates are slated to commence on September 26th, and may prime investors to contemplate how the November 8th election will impact their wealth.

While we acknowledge that election years can elicit an emotional reaction from investors, and can impact the markets in the short-term (the markets typically do not “like” uncertainty), it is imperative during periods of market stress (such as the Brexit vote in June) to maintain a disciplined, goal-based investment approach. Emotional decision-making can jeopardize the long-term goals most important to you, and your family.

Links between party victories and market outcomes: tempting but inconsistent

In the coming months, there will likely be a flurry of pundits forecasting market outcomes tied to the potential election results. We fundamentally believe that implementing investment decisions based upon election outcome speculation is a deeply flawed approach. Investing in this manner is essentially a three-part parlay wager: correctly predicting the election outcome, correctly predicting the market’s reaction to the result and correctly predicting the economic and tax policies the winning candidate will implement.

Furthermore, there are conflicting results in equity market performance linked to victories by one party or the other. During election years, the broad U.S. equity market provided an average annual gain of +11.3% during Republican administration year victories versus +3.3% for their Democratic counterparts from 1928 through 2015 (Strategas Research Partners ). Conversely, the returns during election years were +9.7% in Democratic year wins and +6.7% in Republican year wins from 1945 to 2015 (S&P Global Market Intelligence). Regardless of party affiliation, the equity market has been positive in 18 of the previous 22 U.S. presidential election years (on average +11.2% since 1926).

Financial market implications: macroeconomic and policy factors prevail over political developments

Looking back on previous market performance, the equity market was negative in four U.S. presidential election years including, 1932, 1940, 2000 and 2008. While it may be tempting to believe political party affiliation was a key driver, macroeconomic factors (fiscal and monetary policies, corporate earnings growth, geopolitical tensions, currency fluctuations and demographic trends) dramatically outweighed political developments in terms of affecting market performance. Notably, during 1932 and 1940 we had the Great Depression, in 2000 the Dot-Com Bubble and in 2008 the Great Recession. Supplanting the relevance of political affiliation, market returns are more likely to be sensitive to the winning candidate’s (and Congress’) economic and tax policy reforms.

With the debates around the corner, and with both candidates providing more clarity about their respective policy goals, financial market volatility is expected to intensify. The imposition of trading tariffs, adjustments to the Affordable Care Act as well as potential actions by the Environmental Protection Agency have been advanced by one party or the other over the past few months. If enacted, policy decisions in these areas would potentially impact the healthcare, manufacturing and energy industries directly as well as consumer spending indirectly (consumer spending represents approximately two-thirds of the U.S. economic growth). Of course, given the nature of our political system, and the checks and balances which it affords, the actual degree of uncertainty is even greater.

While we are closely monitoring the developments of the upcoming election, we emphasize that the ability to adhere to a fundamentally-driven, diversified investment allocation will do much more to support one’s long-term financial goals than reacting to the speculation leading up to, and the eventual results of the presidential election.

Disclaimer