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Monday, October 25, 2010

What's Wrong With This Picture?

You've seen it. It's a full page ad in the local paper. Smiling couple with a Green Box emphasizing their smiling faces and the biggest type on the page asking "Who Says You Can't Get A Competitive Yield In Today's Economy?"

Your eye goes does the page and in the middle you see 9.41% as the total return and 4.88% as the "Distribution Yield/" That sure beats the yield you and I are getting on our CDs, Treasuries, bond finds etc.

But it's not a yield comparable to a yield on Treasuries or CDs etc,! It's a distribution yield based on a total return. Here's my rough guesstimate-probably less than 20% of the people reading this ad could explain the difference between total return and yield. But everyone of them feels that the yield on their investments as they now stand is pathetic. The fact is that the return reflects a sharp drop in interest rates and a consequent rise in bond prices. Experts today are warning about a bond bubble. If interest rates rise and stock prices fall, what will happen to the "competitive yield" on this fund?

We know the managers will do ok - they're charging 1.75% right off the top. It's not clear what the funds they invest in charge.

Read the fine print. If you are over 55 years old, you'll probably need a magnifying glass. In the fine print the breakdown of the portfolio is given, and it states that 64% is invested in equity funds!

Looking for yield? Need income to live on? Invest in equities!

When the housing bubble burst, people acted like they were shocked about how low prime loans were marketed and made requiring no documentation, no down payment, ridiculous teaser rates etc. that would be reset and result in payments the buyer obviously couldn't make.

How many times do we need to be shocked before we start requiring the financial sector to do the right thing.

To me, emphasizing yield on a total return fund (especially when so many are desperately seeking investments that provide a good yield)is misleading and unconscionable at worst.

What's your take?


  1. Sounds like deceptive advertising to me. But people will spend more time researching a TV they want to buy than an investment, and which of the two is more important?

  2. Suppose we do this: let's take a 68 year old retired couple with, say, $120,000 in an IRA and social security as their retirement income have them sit down with the bank's investment specialist. Suppose they tell the specialist that they have the money in a CD that is getting ready to mature and the best yield they can get is 1.5% for 1 year. They say they saw the yield in the paper of 4.88%. They ask the "specialist" should they take their CD and put it into this product.
    What will the specialist say? The odds are that this is a totally inappropriate investment for this couple. If interest rates rise by 2% and stocks dropped by 10% over the next 12 months (plausible) they will get hurt badly in this investment and their retirement could be severely impacted.
    I understand your point about researching but the fact is that people are really clueless on investments and get impressed by a jargon talking young 29 year old "investment specialist".
    All I'm saying is that it is an accident waiting to happen and it falls through the cracks until the market implodes.
    I'm thinking that shareholders who are knowledgeable should write the president and ask if this type of ad is appropriate.
    I don't know...people are severely financially illiterate and the regulators are incapable of doing their jobs - they can't even keep mortgage records handling people straight!

  3. That's the president of the bank...not Obama!

  4. I do think it is misleading and unfortunate. I also think that such specifics cause people to avoid investing on their own (although I would suspect that DIY investing is growing rapidly).

  5. re: Shawn Not that rapidly. It is surprisingly difficult to explain some of these issues to the general public. The contributors to the financial blogosphere are financially literate - not so the general public.

  6. Robert,

    In highschool, people need to be taught the tricks of marketers---especially financial marketers. But when the average teacher would easily fall prey, where do you start?

  7. As soon as you say "bank investment specialist" I'm immediately suspicious. I didn't know such a being existed, I thought they were all salesmen looking to make the highest commission. People tend to trust banks as being conservative (and often get confused about the FDIC guarantee) placed to invest. But that is not true these days.

  8. C'mon Grouch. A bank investment specialist is a 27 year old male who partied his way through school but was smart enough to pass a series 7 and a series 62 exam 5 weeks ago. He is ready to sit down with you and advise on how to invest your life savings.
    Andrew has a good suggestion - teach the tricks of finance marketeers in high school. Actually it would only take a couple of hours. If Life 101 is a required subject then it would be a perfect lesson.