Recommended Reading

The Millionaire Next Door by Thomas J. Stanley and William D. Danko

This book profiles US households with net worths of at least $1,000,000. Not only does it dispel the myth that most millionaires inherit their money, but it also details the saving and spending habits that helped these individuals accumulate their wealth. Since this book focuses on their lifestyle choices rather than investments, you don’t have to know anything about investing to benefit from reading it.

Why Smart People Make Big Money Mistakes and How to Correct Them by Gary Belsky and Thomas Gilovich

This book studies why we make the decisions we make when it comes to spending, saving, and investing. The authors believe - and I wholeheartedly agree - that by studying the psychological factors behind your economic decisions you'll be able to change your behavior in ways that will benefit you financially.

Investing in an Uncertain Economy for Dummies® by Sheryl Garret and Members of the Garrett Planning Network

This book contains over 80 investing and financial planning "tips" from independent, fee-only advisors. The fact that it touches on so many topics - rather than focusing on a single area like "mutual funds" or "insurance" - makes it a great resource for new investors or a reference for experienced investors. Full disclosure: although I’m a contributor to this book, I don’t receive any compensation when someone purchases a copy.

Common Sense on Mutual Funds by John C. Bogle

Most investors are better off investing in mutual funds rather than selecting individual stocks and bonds. Unfortunately, even if you narrow down your investment choices to “mutual funds”, you're still left with thousands of alternatives. This book will help you sort through the noise and get a better understanding of the world of mutual funds.

Deal with Your Debt: The Right Way to Manage Your Bills and Pay Off What You Owe by Liz Pulliam Weston

Most books on debt focus on how to eliminate it completely and encourage readers to avoid debt at all costs. But since most people find completely avoiding debt unrealistic, this book helps readers understand how to manage it effectively. It covers strategies for dealing with every form of debt including credit cards, student loans, auto loans, and mortgages.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com

Free Financial Resources

www.PowerPay.org

If have credit card balances or any other unsecured debt you’re having trouble eliminating, or just want to get your spending under control, then you should check out PowerPay.org. This site has several helpful calculators you can use to eliminate debt, develop a spending plan, and save more.

www.Investopedia.com

The investment world is filled with specialized terms, acronyms, and other lingo, and Investopedia.com is the place to go when you come across something you don’t understand. This site has information on asset allocation, zero coupon bonds, and everything in between.

www.Bankrate.com

Bankrate.com is a useful resource if you want information on mortgages, checking and savings accounts, CDs, credit cards, debt management, and other similar topics. Use this site to see the latest mortgage rates, check savings and money market yields, and read about numerous other financial topics.

www.SavingForCollege.com

The obvious purpose of this site is to help people save for college education expenses. It’s a great website to use if you want to know more about 529 plans, Coverdell ESAs, applying for financial aid, or anything else associated with college savings.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com

10 Questions to Ask Your Mortgage Broker

The mortgage application process is easier if you know what questions to ask.

If you want a second opinion on any mortgage you're considering, look for a fee-only financial advisor that charges by the hour. (Click here to find one.)

Whether you complete the process yourself - or hire an advisor to guide you - here are a few questions you should ask:

Question 1: What is the interest rate?

This is the first question to ask since the interest rate ultimately determines how much your home costs you. When comparing two or more loans, use the annual percentage rate, or APR, since this number includes lender fees.

A fixed-rate mortgage is the safest alternative, but an adjustable rate mortgage might offer a lower rate. If you select an adjustable rate mortgage, realize you're taking on more risk and be sure you know (1) how often it will adjust, (2) the maximum annual adjustment, (3) the highest possible interest rate, as well as (3) the index and margin.

Question 2: Are there any discount or origination points?

A lender might charge you discount points that benefit you by lowering the interest rate, as well as other types of points that might not benefit you at all.

Paying discount points might be a good idea if you plan to stay in your home for a long time, but ask to see a loan without points to compare the fees and interest rates between the two. You should calculate the "break-even point" to see how long you'd need to stay in your home for the lower interest rate to justify the higher up-front costs.

Question 3: Will the lender guarantee the Good Faith Estimate?

Mortgage lenders are required to provide a Good Faith Estimate that contains all of the costs of a loan you’re considering. Although lenders aren’t required to guarantee these numbers, it never hurts to ask your lender if he or she will stand behind the estimate.

Question 4: What is the total cost of the loan?

There are a lot of fees associated with obtaining a mortgage. Some fees – like points, origination fees, and underwriting fees – go to the lender and underwriter. Other costs are related to the third parties involved in the mortgage process and should be the same no matter who you select as your lender. Some examples of third party costs include fees for an appraisal, a title policy, escrow fees, recording fees, homeowners' insurance costs, and pre-paid taxes.

Question 5: Can I lock in the interest rate?

The interest rate will fluctuate during the application process until you choose to “lock” it. Ask your lender when you can lock in the interest rate and if there are any associated fees.

Question 6: What are the qualifying guidelines for the loan?

The lender will have certain qualification guidelines that relate to your income, assets, job, credit score, and other factors. If you need a mortgage with lenient terms, look for a first time homebuyer or VA loan if you’re eligible for these types of loans.

Question 7: What documentation will I have to provide?

Most loans require that you prove your income and assets, but some companies require more documentation than others. Make sure you know what you’ll need ahead of time to avoid surprises. And don’t make assumptions! A “stated income” mortgage I had several years ago actually required a bank statement to substantiate my stated income!

Question 8: Is there a prepayment penalty?

Some mortgages have penalties if you prepay the loan by refinancing or selling. Always make sure to check for a prepayment penalty. And, although a loan with a prepayment penalty might have a lower interest rate, it’s generally a good idea to avoid them.

Question 9: What is the down payment required for the loan?

Find out what cash you’ll have to bring to the table to qualify for the mortgage. You might qualify for a lower interest rate if you put down a lot on your home, and most lenders will require private mortgage insurance if your down payment represents less than 20% of the purchase price.

Question 10: How much time will it take to close the loan?

The time it takes to close a mortgage depends on a variety of factors and will vary from lender to lender. Closing times ranging from 30 to 90 days are common. Ask your lender what to expect so you’ll know what closing date to include in your offer and how long to lock in your interest rate.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com

Year-End Tax Tips

Tip 1: Be careful when buying a new mutual fund.

Most mutual funds pay out capital gains and dividends toward the end of the year, so check for potential distributions before you purchase a new fund. And think twice before purchasing a fund that will be distributing a large amount of gains and dividends.

The IRS doesn't care how long you’ve held a mutual fund when it comes to taxes on distributions. Investors that purchase a fund just before the payout will be taxed the same as the investors that have held the fund throughout the year.

Tip 2: Prepay your property taxes.

Property tax payments aren’t due until the end of January, but if you pay them before the end of the year you can claim the deduction in 2009. But if you expect to be in a higher tax bracket next year, you can wait until January to pay then prepay next December so you can deduct two years of property taxes in 2010.

Tip 3: Pay your January mortgage payment before December 31st.

By paying your January mortgage payment before the end of the year, you’ll be able to increase your mortgage interest deduction this year by the extra amount of interest you pay in the January payment.

Tip 4: Review your portfolio.

Investment gains can be reduced by investment losses, and excess losses can be written off against income up to $3,000 and rolled over to future years. But before you start selling investments, remember that the long-term capital gains tax rate for individuals in the 10 and 15% tax brackets is 0%, and this is scheduled to continue through 2010.

Tip 5: Defer income.

If you’re self-employed and use the cash method of accounting, you might be able to benefit from waiting until the end of the year to invoice customers so you don’t receive the income until January. This is especially beneficial if you expect to be in a lower tax bracket next year.

Tip 6: Contribute to your 401(k) or 403(b)

Contributions to 401(k)s and 403(b)s will reduce your taxable income for the year. In addition to saving money on taxes, you'll also receive "free money" from your company if they match your contribution.

Keep in mind that some 401(k) plans now offer employees the option of making "Roth type" contributions that don't reduce your current taxes but will be tax-free when withdrawn if you meet the requirements.

Tip 7: Contribute to a Traditional IRA

Contributions to a Traditional IRA will reduce your taxable income for the year just like contributions to 401(k) and 403(b) plans. Just make sure you are eligible to deduct the amount you contribute. (Click here to check the deduction limits for 2009.)

Tip 8: Don't contribute to your 401(k), 403(b), or Traditional IRA

Yes, this tip contradicts tips 7 and 8. The point of this tip is that you need to balance current tax savings with future tax savings. It might be better for you to avoid taking a tax deduction now in favor of contributing to a Roth IRA, or making "Roth type" contributions to your 401(k), in order to have a source of tax-free income in retirement.

Deciding whether to take the tax deduction now or later involves some calculations, knowledge of current tax law, forecasts about future tax law, and a little bit of "gut feeling"; so consult your tax advisor or a "fee-only" financial advisor if you want professional guidance.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

This and all other posts on this blog are for informational purposes only. This is not to be considered tax advice and is not intended to be used, and cannot be used, for the purpose of (1) avoiding tax penalties under the Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Questions to Ask Before Marriage

Since disagreements about money often lead to marital problems, be sure to discuss finances with your fiancée before saying "I do".

If you want a neutral third-party to help you cover the important financial questions, look for a "fee-only" financial advisor that bills by the hour. (Click here to find one.) This will make sure you get the advice you want without sales pressure.

Here are some of the questions you should consider:

Question 1: What are our assets and liabilities?

One of the first steps you should take is to create personal balance sheets that detail what each of you owns and owes. These purpose of these balance sheets is to see where each of you stands financially and see how your combined financial situation would look.

Question 2: How will we handle existing debt?

You need to determine how you’ll handle any existing debt, especially unsecured debt like credit cards. Will you pay it off before marriage? Or after? If you bring it into the marriage, be sure to keep the other person’s name off of these obligations to avoid possible problems in the future.

Question 3: What do our credit reports look like?

Since our credit reports and scores affect everything we do, each of you should check your credit reports and scores to see where you stand. You can go to www.AnnualCreditReport.com to get your reports for free, but you will have to pay to see your FICO score.

(Note: If you see the word "free" in a website's URL, your credit report won't be free!)

Question 4: How will we handle daily spending decisions?

You don’t necessarily have to set a budget, but you do need to decide how you’ll handle daily spending decisions, especially if one or both of you tends to be a “spender” rather than a “saver”. Will you have a joint account? Separate accounts? And if you keep your accounts separate, who will be responsible for paying the bills?

Question 5: What are our financial goals?

Just as important as day-to-day financial decisions, you need to discuss your future financial goals like college expenses for children and retirement to make sure you are in agreement. It is best to put your financial goals in writing. If you don't like the idea of going through the financial planning process, at least consider jotting them down on paper.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Lessons of the Fall

Aristotle observed that true learning only comes through pain. Following that logic, the recent market downturn should have taught us a lot!

Here are some of the things we learned (or should have learned!) over the past year:

Lesson 1: Reassess your risk tolerance.

Are you less aggressive than you originally thought? If fear led you to sell during the decline, then your risk tolerance is probably more conservative than you originally thought and you should make the appropriate changes in your portfolio.
Lesson 2: Reasses your expectations about future returns.

Still dreaming of the double-digit returns of the ‘80s and ‘90s? Make sure you base your projections on realistic expectations of future returns. It’s better to be surprised to the upside rather than realizing you won’t be able to retire because you didn’t get the returns you expected.
Lesson 3: It's OK to turn off the financial news.
Newsflash: The financial press cares about making money, not whether or not you achieve your financial goals! So during the next downturn (yes, there will be another one!), turn off the “doom and gloom” and stick to your financial plan. (Don’t have a financial plan? See “Lesson 5”.)
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Lesson 4: Cash is king.

Cash is important for several reasons. First, everyone should have a cash reserve for emergencies. Second, cash holdings are stable, so having cash in your portfolio can calm your nerves when the market is falling. Third, downturns like the one we’ve experienced can create excellent buying opportunities, and the only way to take advantage of them is to have cash on hand. -->
Lesson 5: Don't leave your financial future up to chance.

Financial success doesn’t occur by chance, so take an active role in planning your finances. Make sure your financial planner is providing sound financial advice rather than simply selling financial products. The best way to do this is to work with a “fee-only” advisor that never accepts commissions from his or her recommendations. And, if you’re a “do-it-yourself” investor, consider getting a second opinion from a fee-only advisor that works on an hourly basis. -->

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Credit Scores - What You Need to Know

I co-host a regular TV spot called "Your Money Monday"*. The purpose of the segment is to provide information on various financial topics, and from time to time we answer viewer questions.

Several months ago we got a question about "credit" and "credit ratings", and here's what we covered during that segment...

Q. We’ve all heard about someone having “good” or “bad” credit, but who actually makes the decisions about a person’s credit rating?

There are three major “credit bureaus” - Equifax, Experian, and TransUnion - that collect information about you and use it to build a credit file. The information in your credit file is used to calculate your “credit score” and this score is an estimate of your “creditworthiness”

Q. A credit score will obviously affect someone’s ability to get a loan or a credit card, but do these scores affect our lives in any other way?

Credit scores have a huge impact on our lives. When applying for credit, our scores will determine the interest rates we'll pay, and a lower score will translate into a higher interest rate. So having a low score will lead to paying thousands more in interest over time.

In addition to getting credit, credit scores can impact our ability to get homeowner’s insurance, auto insurance, cell phone service, rent an apartment, or even get a job. Don't underestimate the importance of obtaining and maintaining a good credit score!

Q. What are some of the keys to obtaining a good credit rating?

Other than the obvious strategy of paying your bills on time, here are a few things to keep in mind:

Age - An older credit file will be more stable, so it’s important to keep old, good accounts on your file even if you’re not using them anymore.

Debt Utilization – Make sure you’re not using more than 10% of your available credit at any time. For example, if you have a credit card with a $10,000 limit, you never want to have a balance on it larger than $1,000. The debt utilization ratio applies to each line of credit as well as your combined credit limit.

Inquiries – Every time you apply for credit, the inquiry that shows up on your report can lower your credit rating. Inquiries can affect your score for up to 12 months. When shopping for credit, grouping your inquiries together in a short period of time - rather than spreading them out over several weeks - will lessen the impact on your score.

Q. What should someone do to learn more about their credit file and credit score?

You should check your credit report at least annually in order to make sure it’s accurate and to guard against identity theft. Under federal law, everyone is entitled to a free credit report once a year from each of the credit bureaus. You can go to www.annualcreditreport.com to get your free copy.

If you decide to purchase your credit score along with the credit report, make sure you’re purchasing a FICO score since this is what most lenders use.

*"Your Money Monday" airs each Monday during Texas Today on KCEN 9, the Waco area NBC affiliate. Email your questions to MoneyMonday@kcendt.com to have them answered on air.

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Top Myths About Investing

Myth 1: Investing is too risky.

Investing in the stock market - and, to a lesser extent, in the bond market - can be risky, especially if you don't know what you're doing! However, not investing in stocks and bonds can be just as risky.

For example, vehicles that most investors consider safe – like savings accounts, CDs, and fixed annuities – don’t keep up with inflation over long time periods. This makes it virtually impossible for most people to save enough in these types of accounts and investments to accomplish big financial goals like retirement.

For large financial goals that are years away, investors need to consider the growth potential of stocks. But, to reduce stock market risk, it's important to diversify stock holdings using vehicles like mutual funds and exchange-traded funds (ETFs) that follow sound investment strategies.

Myth 2: My advisor can help me pick the best investments.

Be leery of any advisor that suggests he or she can pick investments that will outperform the market. The investments recommended by many advisors carry high expenses and commissions that can lower your investment return, and an active trading strategy can lead to a higher tax bill.

If you would like help picking or managing investments, look for a fee-only advisor that doesn't make a living 'selling' investments. Fee-only advisors charge fees for advice, meaning that they don't have incentives to recommend an investment unless they believe it is the absolute best option for you.

Two organizations that represent fee-only advisors are the Garrett Planning Network (www.GarrettPlanningNetwork.com) and the National Association of Personal Financial Advisors (www.NAPFA.org).

Myth 3: Investment performance is the most important factor to help me reach my goal.

Investment performance is important, but you should place primary importance on the things you can control. The first thing you can control is the amount you save. Saving and investing more will increase the chance you'll reach your financial goal. Second, you should focus on controlling costs. Higher cost investments often underperform over time. And third, always follow a clearly defined investment strategy rather than basing your investment decisions on tips from friends or your hunches.

Myth 4: I need to be in a hedge fund to make money.

Hedge funds have three “highs” that make them unsuitable for most investors: high minimums, high costs, and a high failure rate. It’s not uncommon for the minimum investment to be $1M or more, and once in the investment you’ll often pay expenses of 2% per year plus 20% of profits. As far as the failure rate, a study by the European Central Bank found that some hedge fund strategies have annual failure rates of over 14% per year.

While it's not as sexy and exciting as a hedge fund, a diversified portfolio of low-cost mutual funds and ETFs that has a mix of stocks and bonds is best for most investors.

Myth 5: Smart investors buy gold.

Gold gets a lot of attention during times of market volatility. Gold doesn't pay dividends, so any potential return will be from 100% price appreciation. So for an investment in gold to be profitable, you have to buy it in advance of market volatility before the price has risen. And if the price of gold drops, you won't receive any dividends to help cushion the fall.

While gold can be a good short-term hedge, historically it’s been a horrible long-term investment and at times it has been much more volatile than the stock market. At most, gold is a short-term speculative investment and most people are fine without it.

Myth 6: I’m too young to start planning for retirement.

Actually, the earlier you start the better because your investments will have more time to compound and grow, making it much easier to reach your goal. If you wait too long, you might end up having to rely on Social Security and lower your ideal standard of living in retirement. So follow our motto: "invest early, invest often".

To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

You Might Be Your Own Worst Enemy, Part III

(This is the third part of a three part series. The first two parts were published in our last two newsletters.)

Your behavior as an investor is the single largest determinant of your long-term investment return.* In our last two newsletters we discussed several common mistakes that investors make - greed, panic, overdiversification, underdiversification, speculating, and letting cost basis control your investment decisions.

This final installment will conclude with two additional mistakes you should avoid if you want to increase your chances of achieving investment success.

Focusing on Yield Instead of Total Return

Investment returns are the result of two things: capital gains and yield. A capital gain occurs when an investment appreciates in price, and yield refers to the dividends and interest paid by an investment.

Investors tend to shift their portfolios toward higher yielding securities and away from stocks as they approach retirement, but focusing on yield can be problematic since investments with high yields - like CDs and bonds - historically have not kept up with inflation over long time periods.

According to TIAA-CREF, a couple aged 65 has a 50% chance that one of them will be alive in 30 years. That’s a long time and a lot of inflation! Instead of focusing solely on “yield” investors living off of portfolio income would be better served focusing on “total return” and making sure they have a plan to keep up with – or outpace – inflation.

Buying on Margin (Using Leverage)

Investing on margin is similar to buying a home. Investors borrow money from their broker to purchase more of a security than they could afford to purchase without using borrowed funds for a portion of the total purchase.

The problem with margin is that it’s a double-edged sword. Buying stocks on margin is great when prices go up because it magnifies your return. But, when stocks go down, your losses are magnified as well!

The use of margin can get out of hand not only during long bull markets - like the one we experienced in the late ‘90s - but also during volatile markets like we’ve experienced over the past several months.

In a bull market, the mistake investors make is believing that stocks only appreciate. Trying to increase your return using margin during long bull markets can lead to large losses when the market eventually turns around. In a volatile market, investors trying to earn huge returns on the next upward swing can be wiped out completely if a downturn comes first.


*A study conducted by Dalbar found that investors captured less than 40% of the actual market return during the 20-year time period that ended 12/31/2007. This is a phenomenon that has been repeated over and over with surprising regularity!


To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Top Myths About Financial Advisors and Financial Planners

Myth 1: You have to meet strict requirements before calling yourself a financial advisor or financial planner.

There aren’t any requirements to meet before you can call yourself an “advisor” or “planner”, so don't assume that someone using the title "financial advisor" or "financial planner" has the necessary qualifications to "advise" or "plan" anything! Most people that use those terms are really just salespeople.

If you want to make sure your financial advisor has proven qualifications, then look for someone with the CERTIFIED FINANCIAL PLANNER(TM), or CFP® , designation. These individuals have put in hundreds of hours studying for an intense two-day examination, undergone background checks, agreed to a abide by a code of ethics, and are subject to continuing education requirements.

Myth 2: A financial advisor will try to sell me something.

Most advisors do earn their living by “selling” investments and insurance products and have to get there clients to buy something in order to make money. This can lead to conflicts of interest.

You can eliminate this conflict of interest and make sure your advisor is focused on “advice” rather than “sales” by working with a fee-only advisor that doesn’t accept commissions from his or her recommendations. This places the focus on advice rather than sales.

Myth 3: My financial advisor does my planning for free.

There’s no such thing as a free lunch. An advisor that does “free” planning likely earns commissions from his or her recommendations. While commissions aren’t inherently bad, they can lead an advisor to recommend something that might be better for his or her pocket than yours.

A lot of the products that are recommended as the result of "free" financial advice carry high commissions, fees, and surrender charges that can negatively impact your future investment returns. On the other had, fee-only advisors that charge for their advice and don't have any financial incentives to recommend one product over another, are free to recommend the best, lowest cost alternative to you.

Since "free" planning can end up costing you thousands more over time, make sure you focus on the "total cost" of your financial planner's advice rather than only focusing on what you pay out-of-pocket.

Myth 4: My financial advisor has to put my interests first.

Only advisors that are held to a “fiduciary” standard are legally required to put your interests first. Although they are prohibited from using deceptive sales practices, brokers and insurance agents are not held to a fiduciary standard.

Unlike other financial advisors, Registered Investment Advisors are held to a fiduciary standard and are legally obligated to put their clients' interest above their interests and the interests of their firm. Go to www.FocusOnFiducuiary.com to lean about the fiduciary standard and why it's important.

Myth 5: Only wealthy people need financial advisors.

If anything, people that aren’t already wealthy need sound financial advice because they can’t afford to make mistakes with their money and a financial planner can help them avoid costly mistakes and stay on the right track financially.

While many financial advisors focus on attracting only wealthy clients, there are many top-notch advisors that reach out to the "middle market". Look for a fee-only advisor that works on an hourly basis, since an advisor that bills for his or her time is less likely to care about your net worth or investable assets.

Go to www.GarrettPlanningNetwork.com to find a fee-only advisor that bills on an hourly basis near you.

Myth 6: “Fee-only” and “fee-based” advisors are the same.

These terms aren’t interchangeable! Don't be fooled by Wall Street's attempt to blur the line between "fee-only" and "fee-based"!

“Fee-based” should really be called “fees and commissions” since fee-based advisors earn a fee when you hire them and receive commissions from the products they recommend (read: "sell")! On the other hand, fee-only advisors never receive commissions from their recommendations, so this huge conflict of interest is removed.

Myth 7: A financial advisor looks at all areas of my finances.

Many advisors only look at a limited area of your finances – like investments or insurance – so if you want a comprehensive planning, it’s important to find an advisor that has the appropriate qualifications and experience to analyze all areas of your finances, from cash flow, to retirement, tax, and estate planning.


To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.

Mutual Fund Costs and Share Classes

Most of us are hard-wired to perceive high-cost items as being more valuable than lower-cost alternatives. While that might be true in some areas of life, when it comes to investing in mutual funds, selecting funds with low expenses is a great way to increase your chance of investing success.

Numerous studies have shown that mutual funds with low expenses tend to outperform funds with high expenses over time.

The world of mutual fund investing can be broken down into two groups: no-load (no commission) funds and loaded (commission) funds. No-load funds charge an expense ratio that includes a management fee and 12b-1 fee, although many no-load funds don’t charge 12b-1 fees. Loaded funds - classified as either A, B, or C shares - charge expense ratios and pay various types of commissions to the advisors that sell them.

Expense Ratio: Includes the management fee and any 12b-1 fee that is charged. All mutual funds will have an expense ratio.

Management Fee: Pays the fund manager and covers record keeping, accounting, auditing, and other expenses. All mutual funds will have a management fee.

12b-1 Fee: A sales charge that is paid to the selling agent to cover marketing of the fund. By law, no-load funds can’t charge a 12b-1 fee over 0.25%, but loaded funds can accept 12b-1 fees.) All loaded funds will have 12b-1 fees, but many no-load funds will not have 12b-1 fees

Loaded mutual funds (funds that charge commissions) will be classified as A, B or C shares.

Class A Shares: Charge an up front commission, deducted from your initial investment, that usually starts around 5.75%. Discounts, or “breakpoints”, are available under certain circumstances. A shares can be “load waived” as well, meaning the front end load is waived, but 12b-1 fees still apply.

Class B Shares: Charge a back-end commission starting around 5% that declines over 5 to 10 years until eliminated. B shares charge a high 12b-1 fee to compensate for the commission paid to the selling agent.

Class C Shares: Usually charge a 1% back-end load if sold within the first year. C shares charge a 12b-1 fee of 1.00% that goes to the selling agent. Don’t let an advisor tell you that a Class C share is a “no-load fund”! It isn’t!

Now that you know the various fees charged by mutual funds, you can look at your portfolio and figure out what you’ve been paying.

My advice is to avoid loaded mutual funds in favor of no-load funds with low expense ratios and no 12b-1 fees. Those are the types of funds I purchase for myself and recommend to my clients.


To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.