Mutual fund investors abandon ship for better asset management alternatives
By Don Wilkinson
DFW & Associates
The $10 trillion mutual fund ship is still very much afloat, but sinking fast after investors have endured a bruising year with devastating returns and high capital gains taxes.
According to investment researcher Morningstar Inc., "Out of almost 2,100 diversified retail U.S. stock mutual funds that are open to new investors, just 17 have generated positive returns during the past 12 months and year to date."
In fact, the number of "no mutual fund" investors has increased to 16 percent from 6 percent in just two years (2006-2008). According to a new study by Mass.-based Cogent Research, it was found that established mutual fund investors presently retain an average of 40 percent of their portfolios in funds, down from 53 percent in 2006.
In total, mutual fund assets that stood at $10.6 trillion on September 30 are down 8.7 percent from $11.6 trillion at the end of August. Stock and bond funds posted net outflows of $63 billion in September, up dramatically from $12.1 billion in August, according to the Investment Company Institute, based in Washington, D.C.
"The economic downturn is accelerating a continuing move from mutual funds to alternative products, says Christy White, a principal at Cogent. "This is a perfect storm going on."
In addition, mutual funds are plummeting each year with capital gains taxes shrinking their return on investment (ROI).
As a case in point, taxes took the largest bite ever out of taxable mutual funds in 2007, setting a new watermark. For the 2007 tax year, more than $24 billion -- the highest capital gains tax shocker billed by the IRS in stock market history -- stunned mutual funds holders, according to fund research company Lipper Inc.
Since substandard performance is presently the norm in mutual funds, and recent tax-break laws will sunset in 2010, it would be prudent for advisors with taxable mutual fund clients to help them reduce one of the main drags on their performance -- taxes.
Thus, advisors should take their buy-and-hold mutual fund clients incurring huge mutual funds losses and put their fund assets into CDs, exchange-traded funds (ETFs), annuities and the new bright star in the alternative investment horizon, the unified managed account (UMA). Just like the separately managed account (SMA), the UMA rewards the knowledgeable advisor and client with asset customization, professional money management, and, most importantly, reduced tax liability.
As most advisors know, SMAs and UMAs are asset-management-building portfolio strategies managed by independent money managers under an asset-based fee structure offered by financial advisors and other financial agencies.
The UMA is particulary attractive as an alternative investment over mutual funds because it underscores one of the most important demands characteristic of the human psyche: simplicity.
The UMA is a fully integrated asset management system providing comprehensive investment management in a single account. It removes the need for more than one account and combines all the assets into one account with a single registration.
Best of all, the UMA -- possessing all the positive aspects of the traditional SMA -- can also include most other alternative asset management vehicles (e.g., stocks, bonds, inverse noncorrelated assets to the stock market, ETFs and more) in a client's portfolio.
Again, the portfolio is arranged simply as one single account.
Don Wilkinson, owner of a wealth management firm in Newport Beach, CA -- DFW & Associates, has all the details about UMAs and SMAs in a book for advisors and clients. For more information about his book, "Stop Wasting Your Wealth in Mutual Funds... Separately Managed Accounts -- The Smart Alternative," simply use the forum below this article, and be sure to include "Stop Wasting Wealth" in your comment.
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