Allocation Programs Can Provide Stability
Over the past couple of years, several brokerages and other financial companies have unveiled asset-allocation programs built around mutual funds. Lately, even some bank-affiliated firms have been getting into the act.
This could be important, because a lot of bank customers--who are deemed to be a fairly unsophisticated group--have been buying mutual funds of late.
By providing guidance to novice investors, the allocation programs might be able to keep some of these new fund shareholders from panicking during the next major downturn in the stock or bond markets--as skeptics think they will.
Asset allocation is the process of mixing and matching mutual funds--or other investments--with an overall blueprint in mind. The general idea is to diversify among the major financial asset classes--stocks, bonds, cash and various subcategories--in a way that fits each person’s risk tolerances and reward expectations.
Investors can do all this on their own or with the help of a broker or financial planner, of course, but the formal programs offer some benefits.
These include quarterly portfolio reviews, assistance from a specialist and, in many cases, automatic shifting of money among different types of funds as market conditions warrant--with no action required of the investor. Most such adjustments are fine tunings, as the emphasis is on maintaining broad diversification.
Many allocation programs are designed for traditional savers like Marilyn and John Gutierrez, a couple in Northridge, who for years kept their money in certificates of deposit and other bank products. Last year, they shifted cash into the Sierra Asset Management Account, an allocation program unveiled three years ago by an affiliate of Great Western Bank.
If CDs had continued to pay 8% or 9% interest, the couple probably never would have made the move, Marilyn Gutierrez admits. “I can’t say I feel totally secure about stock funds, but the balanced approach does make me feel better,” she said. “So far we’ve done very well--certainly better than what we would be getting in CDs.”
The balanced portfolio in which they have invested is an average-risk strategy designed to be held for at least three years. It holds six funds, with a current 45% weighting in stocks and 55% in bonds. The portfolio has positions in foreign securities on both the equity and fixed-income sides.
Sierra investors can also choose among four other model portfolios, each with different risk assumptions, return objectives and fund holdings. “Our feeling is that people need to be more diversified among the asset classes, whether they are bank customers or not,” said F. Brian Cerini, chairman of the Sierra Trust Funds, which are used in the allocation program. “A lot of people have a tendency to overemphasize one kind of investment--real estate, CDs or whatever.”
With the Sierra program, investors pay normal fund operating expenses, plus “loads” or sales charges on certain funds. There’s also a maximum 0.65% annual management fee for the allocation service.
When Sierra’s managers feel a portfolio shift is warranted, they will automatically move money among funds in an account, without requiring any action on the shareholder’s part.
Sierra Asset Management (800-222-5852) has one of the lowest minimums for a full-service allocation program at only $10,000. It’s open to investors across the country.
As a drawback, the program is limited to 10 funds in the Sierra Trust family. Many competing allocation programs also restrict customers to their own products.
Not so with Johnson Capital Accumulation Portfolios, a program available through little Biltmore Investors Bank. Managers here can choose among nearly all available mutual funds--load or no-load (with the load shares available on a no-charge basis). The program features 11 distinct portfolios of funds, tailored to clients with different risk/return profiles.
Adjustments are done on a quarterly basis. Investors can make the moves themselves or can elect to have the assets shifted automatically for them--a feature known as “discretionary” management.
This program, which started in 1992, is designed for people with $100,000 or more to invest. In addition to fund operating expenses, investors pay a flat $600 fee plus a maximum 1% of assets--$1,600 on a $100,000 account, for example.
Although Biltmore Investors Bank (602-381-6800) has offices only in Phoenix, Milwaukee and Lake Forest, Ill., the program is available to people in other states, including California.
Then there are various fund-allocation programs offered by several national brokerages, including Smith Barney/Shearson, Kidder Peabody and Prudential Securities.
Most of these programs emphasize in-house funds, as do competing plans available from a handful of mutual fund families--namely Fidelity Investments of Boston and Chicago-based Stein Roe, whose programs were discussed previously in this column.
One exception is Paul A. Merriman & Associates of Seattle, which in addition to offering a small family of market-timing mutual funds has a buy-and-hold allocation program.
The Merriman service (800-423-4893) picks and chooses among most available funds on a no-load basis. It’s available for people with $100,000 and up to invest, who pay $500 yearly plus a maximum 0.1% of assets.
Questions to Ask
Here are some of the items to inquire about when considering a mutual fund allocation service
* What are the fees? Investors pay normal operating expenses charged by each fund--a number summarized as the “expense ratio.” They also pay an additional fee for the allocation service itself.
* How about loads? In some programs, you also pay a sales charge applicable to individual funds. Other services use only no-load products or are able to circumvent the charge because they invest in large volumes.
* How many funds are available? Many programs will build your portfolio using only those funds from a particular family. Other services have freedom to select virtually any fund.
* How personalized is the portfolio? Most lower-cost, low-minimum plans will not create a unique mixture of funds for you. Instead, your money will be placed into one of several model portfolios, based on your risk tolerance, return expectations, time horizons and other factors.
* How many funds are held, and how often are changes made? Most services will put investors into four to 10 mutual funds, with adjustments made perhaps on a quarterly basis.
* Is the program discretionary? This means the adviser will automatically buy or sell shares for your portfolio when conditions warrant, based on your risk, goals and other circumstances. Some programs merely give advice, requiring the investor to make the necessary trades.
