Have you been sold a mutual fund by a stockbroker? There is probably a reason why this happened, and Tom explains what that reason is in this week’s Mullooly Asset Management video. Tom uses a real story to explain why brokers are more inclined to suggest buying mutual funds. Even though a clear alternative to mutual funds exists, brokers will (most of the time) be more interested in getting you to look at mutual funds. This is because of the built in fees that exist in the majority of these funds. These are called 12b-1 fees and they make sure that the broker who sold you the fund gets paid 1% every year.
A good alternative to mutual funds are Exchange Traded Funds (or ETF’s). Exchange Traded Funds do not contain 12b-1 fees, and typically cost much less than mutual funds. Tom even cites an example of a mutual fund and an ETF that feature all of the same stocks. Investment Advisors tend to favor ETF’s. This is because if they work through a discount broker, the commission on buying or selling an ETF is usually quite cheap (about $10).
So why do brokers largely ignore this seemingly better alternative to mutual funds? First off, they will not be getting the same rate as an Investment Advisor working through a discount broker. Another reason is that these mutual funds create revenue for the brokers and their firms. A broker’s job is to create business for their firm. This could potentially affect the kind of investment advice you receive from them. Listen to Tom’s story about mutual funds and ETF’s in this week’s video.