Money Matters

Do your homework on recommended investment products

February 16, 2013 

Q. I came across something a few weeks ago that I found rather disturbing. When I asked my adviser about it he just brushed it off and said the law suit against the financial services company for whom he works (Ameriprise) has no merit and was just filed by a handful of disgruntled employees. He also said the company recently was granted a motion to dismiss which proves the lawsuit had no merit. What bothers me is the fact that I’m in some of the very same investments that these employees claim are poor performers and have high expenses. How do I know if the claims about these funds are true? Is the lawsuit cause for concern?

A. Your main cause for concern is the reaction of your adviser to your question. He is correct that Ameriprise Financial filed a Motion to Dismiss the Amended Complaint for Failure to State a Claim and on November 20, 2012, in a Memorandum Opinion and Order, a motion to dismiss was granted but on only one of eight complaints. The Federal Judge denied the motion to dismiss on the other seven. In summary, the class action lawsuit (filed by and on behalf of employees participating in the company’s 401k plan) accuses the trustees of the employee retirement plan of violating their fiduciary duty owed to participants of the plan. The Plaintiffs allege that the firm’s proprietary funds were selected as investment options in the plan even though these funds had little or no track record, underperformed, and had higher expenses than similar funds. The lawsuit alleges that by using these funds, the company benefited financially to the tune of $20 million.

When you are working with an adviser and they recommend their company’s proprietary investment products, you need to ask why they prefer these investments over the numerous other options available. Asking for a report from a rating service, such as Morningstar, is always a good idea before you invest based on an adviser’s recommendation. A useful report should contain all of the most important information found in the prospectus but in a more user friendly format. Some of the major items to look for when investing in mutual funds are listed below:

1) Find out what share class in which you will be investing. Front-end loads or “A” shares charge an up-front fee/commission. Back-end loads, “B” shares have a higher price per share and fees are levied on investors who sell shares soon after buying them. Level-loads or “C” shares have a higher 12b-1 fee than A or B shares, usually 1 percent. True no-load funds will not have upfront fees, back-end fees and minimal if any 12b-1 fees.

2) Fees other than commissions will impact performance. All funds have management fees but some are much higher than others. Look for total operating expenses or expense ratio for an idea of annual expenses charged to run the fund. The current average expense ratio is 1.4 percent. Compare expense ratios of like kind funds, usually the lower the better.

3) Current and past performance compared to funds with similar investment objectives.

4) Manager tenure

I have been following this case and the final outcome should be very interesting. The 44-page opinion was filed in the United States District Court District of Minnesota, Case 0:11-cv-02781-SRN-JSM Doc. 67.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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