Before Buying A Mutual Fund, Interview Your Broker

by Alan Lavine and Gail Liberman

Before your purchase a mutual fund from a broker, ask a ton of questions.

Brokerage firm sales of mutual funds have come under pressure from federal and state regulators for misleading sales practices. So find out why a broker is recommending a specific mutual fund before you invest.

If the broker is recommending mutual funds that are run by the broker’s firm, ask if he or she is getting extra compensation for selling the in-house fund. The in-house fund may not be the best deal based on past performance and fund expenses.

What should a good broker tell you about a mutual fund? Here are a few points.

• What does the fund invest in? Does the fund invest in stocks or bonds? Does it invest in large, medium-size or small companies? Does that fund invest in growth stocks or undervalued stocks? Does the fund invest overseas or domestically? Does the fund invest in bonds for income?
• What are the fees?  Do you have a choice of a front-end or back-end load, or is there an ongoing level load?  A load is a commission. What is the fund’s expense ratio?
• Is the broker getting a bonus for selling this particular fund?  In 1986, for example, some fund groups were rewarding brokers with tickets to the World Series for selling their funds. Earlier this month, Morgan Stanley was charged by the Commonwealth of Massachusetts with having contests to sell in-house funds at its Back Bay branch without disclosing the contests and higher commissions. A spokesperson for the brokerage firm said at a recent press conference that the company would respond to state regulators about the charges.
• How has the fund performed over one-year, three-year, five-year and 10-year periods?
• How has the fund performed compared with its peers and similar market indexes?
• How has the fund performed in down markets like 2000, 2001 and 2002? How did it stack up against its peers?
• How risky is the fund? Does it fit in with your investment goals and investment comfort level? How does it impact your tax situation?
• Is the broker concerned about your diversification? You should have a mix of stocks, bonds and cash.  Or, is the broker trying to sell you a hot fund?
• Will the broker help you manage your investment as conditions or your personal circumstances change?
• How long has the fund manager been running the fund? If the fund manager is new, you might want to go with a manager with a longer-term track record. Committees manage some funds. So if one of the co-managers leaves, it‘s not that big a deal.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.