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Sorting Through Your Portfolio Mail

by Bonnie Kirchner

Sorting Through Your Portfolio Mail Splash image

Whoever said we would become a paperless society was mistaken when it comes to the financial industry.

Though online access has evolved and many firms are moving toward e-statements, for regulatory reasons the financial industry is far from paperless. Investors can frequently be inundated and overwhelmed with what arrives in their mailboxes—much of it thrown out, unread. Investors receive statements for each account in addition to annual reports, prospectuses, proxies, and so on. I find many of my investor review meetings begin with a mail-sorting session and discussion about what to keep.

Account Statements

Whether you invest through a brokerage firm or directly with a mutual fund or variable annuity company, you should be receiving statements on a quarterly basis at minimum. Mutual fund companies and variable annuity companies generally provide reporting of assets and transactions to investors on a quarterly basis. Brokerage firms tend to send out statements monthly, though many have gone to quarterly reporting if an account has had no activity. If your assets are being actively managed—in other words, you are paying a fee for someone to manage the account—you are likely to receive an additional statement on a quarterly basis. This is typically a statement that shows not only positions and activity, but also provides performance reporting for the assets and portfolio as a whole.

When reviewing your statement, whether it is of the monthly or quarterly variety, compare the latest positions with those of the previous statement. Has anything changed? Have the number of shares in any one position gone up or gone down? If so, do you understand why? Was something sold, or was there some form of distribution that was reinvested? If so, such a transaction should show up in the activity section of the report. In the event that something was bought or sold, did you receive a separate confirmation statement from the custodian of the account?

If everything matches up appropriately, the old statement can go into the shredder, though I do recommend investors hold on to year-end reports for reference reasons. However, be careful of destroying records that contain important “cost basis” information. Though most fund companies and brokerage custodians do maintain this information for customers, as far as the IRS is concerned, it is each individual’s responsibility to keep track of capital gains and losses. Asset sale information is reported to the IRS; thus, cost information needs to be reported by the taxpayer in order to avoid paying taxes on the entire proceeds of a sale. And though most firms will transfer this information should you move your assets from one company to another, you need to verify that this is, in fact, being done for you—or you could run into some research headaches down the road. This becomes especially tricky if you are reinvesting dividends and capital gains.

Record-keeping for investments within IRAs and other tax-deferred vehicle shells, such as variable annuities, is not necessary from a tax standpoint, as pretax contributions and any growth are drawn out from these vehicles as “ordinary income” and taxed as such. What you must keep track of with tax-deferred accounts are any contributions made with monies on which you already paid taxes. Holding onto any statements with this type of information could be useful to avoid double taxation and for reporting ordinary losses in some situations.

Many firms do provide statement copies online, but be aware that it is not unusual for companies to charge for extra copies or for any research that needs to be done to locate particular information.

Quick Tips

  • Review monthly and quarterly statements in comparison to the prior statement.
  • Match up any buying or selling activity with separate confirmations issued by the custodian.
  • Keep records reporting aftertax contributions and asset purchases.
  • Hold on to year-end statements.
  • Review most recent prospectuses for fee and expense information.
  • When throwing out items, shred documents with references to account numbers and other identifying features, rather than simply throwing them away, to protect yourself from identity theft.

Fund Prospectuses

An investment prospectus, as complicated and intimidating as it may be, is an excellent source of information regarding investments you are considering buying or that a broker may be buying for you. A prospectus is provided before or at the time an investment is made. In many cases, you are likely to end up with not one but two prospectuses: one at the time the investment is discussed and another when the transaction is made.

Even though most mutual fund and exchange-traded fund prospectuses are available online these days, you should still expect to receive one in the mail when an investment is made. New prospectuses are issued when changes are made to the fund, and updated ones are typically provided on an annual basis. Though most investors choose to file these booklets in the trash compactor, it makes sense to keep a file of current prospectuses on investments you own. When an updated prospectus is issued, review it for any relevant changes and replace the out-of-date one. If a security in your portfolio has been sold, it might make sense to then also get rid of the applicable prospectus. And, while prospectuses do not make great reading material, they do contain important information. Here are a few things to look for:

  • Date: Fund companies are required to update their prospectuses every 13 months. Thus, you should be sure you are in possession of one that is up to date—especially if you are making an initial purchase.
  • Investment Objective: The fund’s investment objective is stated at the beginning of the prospectus. Be sure the objective is one that is appropriate for your own portfolio. Pay particular attention to the section describing “risks.”
  • Performance: The prospectus is required to present returns for the past 10 years, or the life of the fund if shorter. Pay particular attention to the down years and translate the percentages to actual dollar amounts. If you had $30,000 invested and the fund you purchased dropped by 30% or more, as many did in 2008–2009, how comfortable would you be seeing your investment decline by $10,000 or more? The performance pages also show you how the fund performed relative to a market index, such as the S&P 500, and give you an idea of how performance could be affected by taxes. This data is not pertinent if you are holding the fund in a tax-deferred account like an IRA, but it is very important if you are holding it in a taxable account. After all, it’s not what you make, but what you keep!
  • Fees and Expenses: Speaking of “what you keep,” the beginning of the prospectus also summarizes fee and expense information. It is here you can see the difference in the fees for the various share classes. The information summarizes the various loads, deferred sales charges, redemption fees, management costs, distribution or 12b-1 fees, and any other costs affecting the different share classes.
  • Shareholder Information: This section includes information about buying, selling, and exchanging fund shares and whether or not there are any required minimums or excessive trading policies. It also goes over options for dividends and capital gains as well as tax information.
  • Financial Highlights: The highlights section is typically at the back of the prospectus and will generally include income and expense data on a per-share basis. The section also covers expense and portfolio turnover ratios. Turnover ratios are not always an indication of tax efficiency, but higher turnover ratios indicate more security sales within the portfolio that could end up as taxable distributions.

Though the prospectus may seem intimidating, it is worth looking through. There is a lot of valuable information presented. The more you get used to reading the prospectus, the more value it will bring in understanding the investments you own and those you are considering in the future. Many fund companies prepare a combination prospectus, where multiple funds are represented in one prospectus booklet. Be sure the information you are reviewing pertains to only the fund or funds you own.

Annual Reports

Mutual fund investors, in addition to receiving an updated prospectus each year, may also receive annual reports and updates from fund families with which they are invested. These reports provide the investor with information regarding the fund’s performance and might offer insight into how the fund did relative to a relevant market index.

Annual reports describe the fund’s results and general market conditions provided by the management team. They also contain long-term performance tracking and information about sales charges as well as expenses.

The portfolio of the mutual fund is included, listing the securities held, the number of shares, and the values as of the date of the report. These updates provide asset and liability as well as operations statements, and include a report from the fund’s independent accounting firm identifying that entity.

The fund’s trustees, officers, and custodian are also identified along with proxy voting results, policies, and information. Tax information is made available as well, along with the fund’s contact information.

These reports are intimidating in appearance, but they do contain useful information to help investors understand the fund in which they are investing.

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Variable Annuity Prospectuses

Like a fund prospectus, the variable annuity prospectus provides a lot of valuable information on fees and expenses, risks, and sub-account performance. Unlike mutual funds and exchange-traded funds, variable annuities have evolved to include all sorts of automatic and elective living and death benefit riders. Thus, a variable annuity prospectus contains a lot more information to digest, and sometimes it is difficult to discern what information is applicable to the variable annuity you are buying. It is for this reason you should be clear on the benefits being presented to you so that you can more easily isolate the parts of the prospectus that pertain to you and your purchase.

Because a variable annuity can be considered a tax-deferred “shell,” which encompasses chosen sub-accounts, you not only need to learn about the sub-accounts in which you are investing, but the “shell” contract as well. Though many of the available contract provisions sound good, additions can make annual costs for a variable annuity skyrocket, so you should be careful with your choices.

[Editor’s note: A variable annuity consists of a policy with the insurance firm (i.e., the shell contract) and underlying investments or sub-accounts, which are most often mutual funds. The policy can include provisions such as a minimum death benefit or long-term care.]

Standard Charges (Most Contracts)

  • Mortality and Expense Risk: A fee charged by the insurance company to protect itself from the various risks associated with issuing contracts to customers with varying circumstances. It is sometimes used to pay the selling costs (commission) of the product and is typically expressed as a percentage of the contract value.
  • Administrative Charges: Charges by the insurance company to cover its administrative expenses in regard to the contract, expressed as a percentage of the contract value.
  • Annual Fee: Another way for an insurance company to cover its administrative and record-keeping expenses, typically expressed as a flat fee.
  • Surrender Charges: Most contracts do not carry “up-front” charges that can reduce the initial investment amount; rather, they carry “surrender” charges that reduce the “surrender value” of the contract.
  • Sub-Account Expenses: Because sub-accounts are similar to mutual funds, they will have an expense ratio, which affects your rate of return. Typically expenses are higher for equity sub-accounts, especially international and small-cap fund replicas, and lower for fixed-income sub-accounts.
  • Investment Change Fees: Most contracts allow for a certain number of sub-account switches each year before a charge is assessed.

Rider Electives

  • Living Benefits: Include principal, growth and/or income “guarantees”; “bonus” benefits (contracts that provide you a bonus or a percentage of your investment upon signing up); and shortened or no surrender charge options.
  • Death Benefits: Provide contract valuation guarantees upon your death.

Proxy Materials

If you are a shareholder of individual company stock, you are likely to receive notification of the company’s annual meeting along with an annual report and voting proxy information.

The annual report identifies the board of directors and senior management individuals of the corporation. It talks about business and stockholder matters, provides financial statements, and gives information on corporate governance, executive compensation, security ownership, and transactions.

The proxy card contains voting instructions along with a return envelope. Voting items can include board positions, compensation matters, and independent auditor appointments.

This article was excerpted from Kirchner’s new book, “Who Can You Trust With Your Money?” (FT Press, 2010). It is reprinted with the permission of FT Press, an imprint of Pearson Education.

Bonnie Kirchner is a certified financial planner in Boston, MA. She is author of “Who Can You Trust With Your Money?” (FT Press, 2010).


Discussion

Don from CO posted over 2 years ago:

In Reference to Varible Annuities..What is an average total fee structure that can be expected from these instruments? With all the moving parts are each part charged? Seems that the total figure could get quite large!

Thanks,
Don


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