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Mutual Fund Commentary

Transferring mutual funds from a particular broker to another is very much possible, thanks to the electronic transfer system. So investors not happy with their broker houses can avail this option and switch to a different brokerage. However, there are certain key areas to be careful about, such as filing the correct transfer form. Also, transferring may involve requests to liquidate a portion or whole assets, and may also involve a margin account. Moreover for mutual funds, transfers also depend on the share holdings and the fund company.

When an investor decides to transfer his funds from one to the other, the new broker will initiate the procedure. A new brokerage account needs to be set up, where the investor will fill in the account transfer request form. This is a crucial step for investors, as wrongly filling out a transfer form may delay the process.

The transfer form will also require information regarding where the investor’s mutual fund shares are held. This takes us to the importance of knowing where the mutual fund share holdings are. Mutual fund shares can be held by the fund company or brokerage house. When fund companies hold the shares, they send mutual fund statements. On the other hand, when brokerages hold fund shares on behalf of an investor, the former will be sending the statement.

The transfer, as mentioned earlier, is done through electronic transfer system or the Automated Customer Account Transfer Service (ACATS) system. ACATS is operated by the National Securities Clearing Corporation. Member firms of the New York Stock Exchange as well as the National Association of Securities Dealer will have to use ACATS. Provided there are no problems, transfers via ACATS will complete the procedure in six business days from when the new broker enters the form into the system.

Meanwhile, the U.S. Securities and Exchange Commission notes that the old firm will compare its information with the one provided by the investor. The two broker houses, new and old, will then review the transferable assets and will also look into if investor has a margin account. During the transfer process, accounts may be “frozen”.

SEC Reviews Brokerage Payments

Brokerages charge a commission for every trade. This is included as transaction costs in the expense ratio. Many investors believe expense ratio to be the only charges levied. However, transactions costs, along with tax costs, soft dollar costs and cash drag may be part of the charges. Transaction costs may be in the form of brokerage costs which may or may not be found in the prospectus.

The current system of payments among the fund houses and brokerages is highly complex and embedded. The disclosures on fees that mutual fund companies pay to broker houses are not properly disclosed. The SEC and the Financial Industry Regulatory Authority have tried in past to improve disclosure and have also tried to stop incentive payments. However, their efforts did not bear fruit.

Now, the SEC is expected to submit a final analysis of the fee infrastructure by end of this year, after 18 months of review process on fees that are paid among the fund firms, advisers and brokerages. The review has acknowledged the existence of a ‘complex geometry of payments’, according to Reuters.

Reuters mentioned: “If SEC commissioners should act on the pending analysis, however, it could lead to an overhaul of how the fund industry pays for sales and how the brokerage industry discloses the money it collects, fund industry officials said.”

Low Expense Funds to Buy Now

As we await the SEC report, investors in the meanwhile can invest in potential mutual funds carrying lowest expenses. The following funds carry a low expense ratio and have no sales load (Read: Skip Sales Load: 3 Top No-Load Funds to Buy).

The following funds also carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect the funds to outperform its peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

The funds also have decent year-to-date returns.

Nuveen Municipal Total Return Managed Accounts (NMTRX - Free Report) seeks high total return along with current income. The fund invests most of its assets in interest-paying municipal bonds. These bonds are exempted from regular federal income taxes. The fund usually invests 10-30% in below investment grade municipal bonds, but may invest a maximum of 50% in those bonds. A maximum of 5% may also be invested in defaulted bonds.

The fund carries an annual expense ratio of 0% as compared to the category average of 0.89%. The fund carries no front-end sales load as compared to the category average of 4.01% and no deferred sales load as compared to the category average of 2.50%.

The fund has returned 11.9% year to date.

State Farm Balanced (STFBX - Free Report) seeks capital appreciation and current income. The fund invests approximately 60% of its assets in common stocks. The fund invests in companies having market capitalization of a minimum $1.5 billion at the time of purchase. At least 25% of its assets are invested in fixed income securities. These securities may include investment grade bonds that are issued by domestic companies or government and agencies.

The fund carries an annual expense ratio of 0.13% as compared to the category average of 0.93%. The fund carries no front-end sales load as compared to the category average of 5.28% and no deferred sales load as compared to the category average of 2.48%.

The fund has returned 9.6% year to date.

Fidelity Spartan Long-Term Treasury Bond Index Investor (FLBIX - Free Report) seeks high current income by investing most of its assets in companies listed in Barclays U.S. Long Treasury Bond Index. The fund maintains a dollar-weighted average maturity of at least 10 years. The fund tries to duplicate the Barclays U.S. Long Treasury Bond Index returns by using statistical sampling techniques on the back of interest rate sensitivity and maturity among others.

The fund carries an annual expense ratio of 0.20% as compared to the category average of 0.56%. The fund carries no front-end sales load as compared to the category average of 3.75% and no deferred sales load as compared to the category average of 2.25%.

The fund has returned 18.2% year to date.

About Zacks Mutual Fund Rank

By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Learn more about the Zacks Mutual Fund Rank in our Mutual Fund Center.