Direct Management Strategy®

In order to understand the importance of the Direct Management Strategy® we must first define the many problems that investing in mutual funds presents. Let’s explore the reasons investors should avoid investing in mutual funds. 

We can then explore the many advantages the Direct Management Strategy® affords the wise investor. Please enjoy the journey!

MUTUAL FUND DEFICIENCIES:

1. Investors don’t own mutual funds. In truth, they only have a “claim” on the underlying assets within the mutual fund. Not having direct ownership of the stocks, bonds and exchange traded funds, (ETF’s), presents many problems we will now explore.

2. TAX INEFFIENCY: The above fact leads to tax inefficiency, non-transparency, high “hidden costs”, over-diversification, secretive behavior and fund under performance. Let’s examine these issues in more detail.

3. How are these funds tax inefficient? A fund can sell a stock with a gain and pay capital gain tax while the stock was a loss for you! Worse yet, the gain you missed will result in tax you must pay at year end. Fund investors can be taxed…even though they owned the shares at a loss!

4. Fund owners that subscribe late in the year will inherit all the fund’s unearned capital gains taxes for the full year. Is that fair?

5. HIDDEN COSTS: Fund owners suffer from costs that are often not disclosed. Costs include brokerage commissions on trades within the fund, (Average loss annually: -0.25%*) Bid-Ask spreads on trades within the fund, (Average loss annually: -0.23%*) 

6. ADVERSE SELECTION: Mutual funds trade stocks in very large amounts, i.e. millions of shares per trade on a single stock. Securities dealers charge a higher price for purchases and a lower price for sales of stocks in their effort to stabilize the market and cover costs.

 7. PRICE IMPACT: Again, when mutual funds buy stocks in very large quantities the price of the security rises as explained above. The price for these large quantity sales of stock results in lower stock prices as well. (The average loss annually is estimated to be -0.94%) yearly.*)

8. ADDITIONAL COSTS: Mutual fund investors also absorb variable annual fees to operate the fund. These fees include Board Member costs, Administrative, Accounting and Audit costs which can be substantial and varied by each mutual fund.

A MOST DESIREABLE SOLUTION…

Our half century of experience in the wealth building and money management space suggests that Registered Investment Advisor managed “Separately Managed Accounts”, (SMA’s), offer the direct ownership of individual securities to overcome many of the above problems. 

This type of account has proven its worth with the very wealthiest investors over time. Questions? Please feel free to contact the writer at 419-246-1871.