A Deeper Look Into Mutual Funds & ETFs

March 9th, 2025

Episode Transcript

Speaker 1 (00:00):
Welcome to the hidden world of wealth, where secrets of
the affluent become accessible to you. You are listening to
your Money Matters, the most provocative financial radio show on
the airwaves. You are about to start your educational journey
here on Your Money Matters with your host, Drew Prescott,

(00:22):
President of Prescott Private Wealth and Chartered Retirement Planning Counselor.
Drew will unlock the complexities of the financial landscape with straightforward,
powerful insights. Whether you're planning for retirement, managing in a state,
or looking to grow your wealth. Consider this your exclusive invitation.
Turn up the volume, lean in closer. Let's navigate the

(00:45):
hidden paths of prosperity together. Your financial enlightenment begins now.
Securities all produce a terror Financial Specialists LLC member FENDRA
SIPC reservices offered through Setara Investment Advisors LLC. So TERA
firms are under separate ownership from any other named entity.

(01:06):
Four five one through sixth Street, Troy, New York one
two one eight zero.

Speaker 2 (01:10):
He whish you do you tu love your dreams? Don't
I'm staying dizzy? You want stay?

Speaker 3 (01:33):
Welcome back, everybody. You're listening to Your Money Matters and
I'm your host, Drew Prescott, chartered retirement planning counselor an
accredited wealth management advisor here at Prescott Private Wealth in Troy,
New York. So welcome back, excited to share this show
with you. This is one hundred percent going to be

(01:56):
a very impactful show for you. So a couple of
weeks ago, probably about four weeks ago, actually, I told
you take a look at your statement. See if you
have ticker symbols that have five characters and end in
an X. If you do, then this show is for you.

(02:18):
So you're not gonna want to go any place at all. Okay,
So I'm the guy that's here to make sure that
your money is working as hard for you as you
did to earn it. And this, folks, you know this,
this is not just another financial talk show. This is
where we cut through the noise, we expose the hidden

(02:39):
traps in the financial world, and we show you how
you can take control of your wealth. Now, let me
ask you something. Are your investments working for you or
are you unknowingly giving away thousands of dollars each year
in unnecessary taxes, fees and in a fe efficiencies. That's

(03:01):
a question for you, and I'm going to help you
out today. So think about it. You've spent years building wealth,
maybe you've got mutual funds, maybe you've got some ETFs,
and you're feeling pretty good about your portfolio. But what
if I told you that some of those investments might

(03:22):
be costing you more than you realize. What if despite
all of your efforts, you're losing thousands of dollars without
even knowing about it. Well, today's show is all about
uncovering those hidden risks, the ones that your fund managers
are not telling you about. We're going to expose real

(03:43):
stories of investors who were blindsided. We're going to break
down the dangers that are lurking inside of your portfolio,
and most importantly, I'm going to show you how you
can fix it. And hey, stick around because I've got
a special offer for you later in the show that
could really change the way that you think about your
investments forever. So let's dive in. Let's start off with

(04:08):
talking about a story that made the headlines back in
twenty twenty four, and this was Vanguard, who was one
of the largest mutual fund companies in the world. They
got into some serious trouble with the SEC. And why
is that because they made changes to their funds that
led to massive tax hit for investors. So here's what happened.

(04:33):
Vanguard had lowered the minimum investment requirements for their institutional funds,
which meant that high net worth investors moved their money
out of higher cost retail mutual funds and into these
cheaper alternatives. Now that sounds like a smart move, doesn't it.
Well here's the problem. This mass exodus forced the retail

(04:57):
funds to sell assets to raise cash, and by doing so,
that triggered huge capital gains distributions. And guess who got
stuck with the tax bill? Well it was the investors
who didn't leave, and they were hit with completely unexpected
capital gains taxes on money that they never cashed out. Well,

(05:21):
here's what the fallout was. The SEC ended up finding
Vanguard one hundred and six point four million dollars because
they didn't properly warrant investors about the risk. And this
is a story that I pulled from Routers, and many
of the investors here were caught completely off guard, finding

(05:41):
themselves with massive tax liabilities that they never planned for.
So what could have been done differently? Well, if these
investors had a managed to count with individual stocks, they
wouldn't have been forced into taxable events caused by other
investors leaving the fund. And this is something that I

(06:03):
always preach about when I have clients and new clients
and perspective clients in the office, because instead, what would
have happened is they could have sold positions strategically using
tax loss harvesting to offset gains, rather than being blindsided
by an unexpected tax bill. So one of the biggest

(06:28):
issues with mutual funds is that they're structured in a
way where all investors share the consequences of a fund's
internal trading. So that's unlike individual stocks, where you can
actually control your gains and losses and when you're selling

(06:49):
and they're based upon your own decisions, where mutual funds
operate as a polled investment vehicle. And what that means
is that if other investors panic in pull out of
a fund, the fund manager is forced to sell holdings
to meet these redemptions, so that triggers uh capital gains

(07:10):
when these sales happen, and those gains they get passed
on ultimately to all of the remaining investors. So like
we said a moment ago, you could actually end up
paying a tax bill even in years where the fund
lost money, So that's not very fun. Now, this is
a problem that many mutual fund investors don't realize until

(07:33):
it's too late, and the only way to truly control
your tax exposure is to own individual securities in a
managed account rather than being at the mercy of a
fund manager's moves. So let me ask you this, do
you even know what tax burden your mutual funds are
creating for you each year? If you don't, it's time

(07:56):
for a review. I would encourage you to call the
office five point eight two zero three, read one nine
to eighty three, or reach out an email Drew at
PRESCOTTPW dot com. Now let's talk about another problem with
mutual funds that most investors do not fully understand, and
it's the built in inefficiencies that lead to dragging down

(08:20):
your returns. So you're paying for positions that you don't want.
When you invest in a mutual fund, you're not choosing
specific stocks. Instead, you're buying whatever the fund manager has picked.
So some of those may be great, but others may
not actually align with your goals. At all, and fees

(08:42):
inside of these funds are eating into your returns. Now,
mutual funds charge management fees, and if you have multiple funds,
you're likely paying some overlapping fees for investments that you
could have owned more cost effectively. Now. Also, you really
have no say in when tax is hit because mutual

(09:04):
funds don't ask you before making trades that trigger capital gains.
And in a managed account, your tax strategy is tailored
to your situation, not dictated by a fund manager that's
trying to meet these redemption requests. So let me share
with you what an alternative could be. A customized investment

(09:27):
strategy where you own individual securities that are tailored to
your financial plan. Your portfolio is tax managed to reduce
unnecessary capital gains, and you aren't paying for trades that
you do not need. So what I want to make
sure that I keep bringing back around here is that

(09:50):
when you first start out, mutual funds are a wonderful
way to accumulate wealth. But as you become more experienced,
and your wealth grows, and you become a little bit
more savvy, and your tax scenario changes and requires a
little extra attention, Well, mutual funds are not designed to
protect your best interests. And here's the reality. Mutual funds

(10:13):
are built to serve the fund company first and you second.
And their mandates that they have on them force them
to make decisions that may not be in your best interest.
And their structure can lead to higher taxes, hidden risks,
and reduced control over your financial future. So what's the alternative?

(10:36):
A personalized investment strategy where you control what happens in
your account, not some fund manager who's bound by outdated
mandates and has thousands of investors to answer to. So
let me make an offer to you. I am going
to offer to you a no cost, no obligation portfolio review.

(11:00):
And this is a very nice offer. I mentioned it
earlier on the show. If you have five hundred thousand
dollars or more invested in mutual funds, or five hundred
thousand dollars or more of investable assets, I'm offering you
a comprehensive portfolio review at no cost to you. So

(11:21):
call the office at five point eight two zero three
one nine eighty three, or just go on PRESCOTTPW dot com,
scroll halfway down the page and select the time on
the calendar. Now, in order to do this, I'll need
to get a copy of your statements so I can
see exactly what your cost basis are, what your positions

(11:42):
that you hold are, and just be able to have
all of this information so that we can input it
into our software and create a detailed breakdown for you.
And what we're going to show you is the hidden
tax drag that's in your portfolio, any overlapping that are
costing you money, and some investment inefficiencies that could be

(12:04):
reducing your returns. So let's make sure that your money
is actually working for you, not just for your fund company.
So here's another interesting story that that was in the headlines,
and this was from Reuters as well. And here's here's
how this one went. Well, this was a big story

(12:26):
because we just talked about Vanguard's fund structure created a
massive tax s trap for investors. But taxes are not
the only hidden risk inside of mutual funds. So what
happens when a funds mandate forces it into a strategy
that doesn't work in changing market conditions? So that question

(12:48):
alone brings us to our next real world example, and
this is a case where strict mandates lead to a
total collapse of a fund, costing investors billions of time.
So if we go back to the Alliance Structured Alpha
fund disaster, this was a mutual fund that had mandates

(13:14):
that caused a major disaster, and it was Alliance's Structured
Alpha funds in twenty twenty. So what happened Well, Alliance,
which is a fantastic company just like Vanguard, they marketed
these funds as having sophisticated risk management strategies that were

(13:35):
designed to protect against market downturns while still generating some
strong returns. So the pitch was that investors could get
market exposure without full downside risk and a strategy that
appealed to institutional investors, pension funds as well, and individual

(13:57):
investors alike. While the problem was that when the COVID
crash hit in early twenty twenty, these funds collapsed spectacularly,
leading to a seven billion dollar loss for investors. Why
was that Well, the funds mandate required it to follow

(14:17):
very specific trading strategies regardless of changing market conditions, so
when volatility spiked, the fund's preset strategy could not adapt
and it fell apart. And the fallout to this was
that fund managers were caught altering performance data and misrepresenting risks,

(14:39):
and that led to serious legal consequences. Now Allions had
to pay over six billion dollars in settlements for misleading investors.
So here's what I'm trying to dig into here is
this mandate. So one of the biggest UH dangers of

(14:59):
mutual fund and investing is fund mandates because they limit flexibility.
And here's why that's a problem. Will a mandate forces
managers to stick to pre defined strategies, so even if
market shifts dramatically, the fund can't just pivot the way

(15:19):
any individual investor or an active manager can. Also, many
mandates don't allow risk management changes, so even if it's
obvious that a downturn is coming, a fund may not
be able to move into safer assets if that move
violates its mandate. Additionally, investors assume that risk managed funds

(15:43):
actually reduce risk, while in reality, many funds rely on
preset formulas and algorithms that fail in extreme conditions, just
like Alliance's fund did in twenty twenty. So what does
this mean for you? Well, if you're invested in a
mutual fund that follows a rigid mandate, you could be

(16:05):
locked into a failing strategy during a market downturn, and
you might think that your fund manager will just adjust
when times get tough, but in some cases they legally
can't because of how the fund is structured. So that's
something that very few people pay attention to and are

(16:27):
aware of. So how could investors have avoided this? Well,
if these investors had a managed account with individually selected holdings,
they could have had one a strategy that was customized
to their specific risk tolerance, to the ability to exit

(16:48):
troubled investments before was too late, and three full transparency,
instead of being locked into a fund where they didn't
control the risks. So unlike mutual funds where your fate
is tied to thousands of other investors, a properly managed
portfolio allows for personalized adjustments in real time. So instead

(17:12):
of following rigid fund mandates, you have the flexibility to
shift into defensive positions before a downturn, sell specific holdings
that pose a risk to your portfolio, and adjust allocations
based on changing economic conditions. So, in other words, a
managed portfolio puts you in control, rather than a fund

(17:37):
company that's locked into a preset playbook. And when I
say a managed portfolio, what I'm saying is a portfolio
that has individual holdings, not a not a fee based
account that has mutual funds inside of their Okay, So

(18:00):
the bigger picture here if we kind of if we
zoom out and say, are you at risk? Because ultimately
that's the question that we're asking ourselves. Right, Well, let
me ask you something. How much do you really know
about the mutual funds that you own? Well, if you

(18:21):
have money and a fund, do you know what mandate
that it actually follows? Do you know if your fund
manager can make adjustments when market conditions change or are
they bound by rules that could hurt you in a downturn?
That's what you want to know the answer to. So
if you have a relationship and you open your statement

(18:43):
and it shows that you're mutual funds, I would go
right to your advisor and say, hey, is there a
reason that you've decided to use mutual funds instead of
individual securities. The answer could be one, they may not
be properly licensed and that's all that they can offer
for you. The other could be maybe they work in

(19:03):
a large firm and their research department has a list
of preferred mutual funds that they are recommending that they
use in the portfolios. That's possible too. We see that
a lot maybe they don't have the research tools available
to them where they don't feel comfortable doing this because

(19:26):
mutual funds are kind of a way to just plug
somebody into different sectors and you don't have to be
very active with that. So serves a good business model
for the advisor, but is it the right thing for you?
And I find that whenever somebody has over two hundred
and fifty thousand of investable assets, there's definitely a better

(19:48):
way forward and it's not using mutual funds. Now. What
I also see is that most investors assume that because
their fund has a profession manager, someone is actively making
the best decisions for them. But we saw with this
ally on seven billion dollar blow up that that's not

(20:09):
always the case. So again, go to your advisor, ask
them why do I hold mutual funds? What would be
the most advantageous thing for me? And if they double
back on mutual funds, just ask them, are you licensed
to be able to sell individual securities? They may not

(20:32):
be like I said, They may have from their home
office or their compliance department have instructions to only offer
certain portfolios. I know that that's common with several of
the big names that are out there. Also, maybe what else,

(20:55):
what else could I what could I be missing here? Well,
you know, maybe they don't do fee based accounts and
they just do a commission based and they're just selling
mutual funds at a commission with a large upfront load
or a c share with ongoing heavy costs. But you'd
have to ask that question if you see them in

(21:18):
there and you've always kind of questioned the relationship. Anyways,
give me a call. I would love to talk to
you five one eight two zero three one nine eighty three.
And for those of you who are just tuning in
you're listening to your money matters. I'm your host, Drew Prescott,
chartered retirement planning counselor and a credited wealth management advisor

(21:39):
and the president of Prescott Private Wealth, located at four
to fifty one Who's Ex Street in Troy, New York.
The web address is PRESCOTTPW dot com. I still have
on there the six common mistakes or tax mistakes, So
feel free to go on put your name an email address.
We'll get that off to you immediately. If you want

(21:59):
to just be added to our mailing list, you can
do that. We're going to have some events coming up here.
You're not gonna want to miss those. Some webinars on
different topics that'll be very valuable. And we also have
some client appreciation things that are gonna be coming up
when the weather gets nice. So where does that bring us?

(22:20):
So that brings me back to we're just talking about
the alliance blow up there. Let's talk about tax drag. Now,
if you're not familiar with the term, I'm going to
teach you what this means. Now, this is something that
will always play a part in your overall investment return. Okay,

(22:43):
so even if you're mutual funds, if you're investing in
these mutual funds and the mutual fund isn't collapsing like
allians one that we just shared, you could still be
losing money every year due to something that most investors
never even think about. And what that is is it
capital gains distributions. And we're going to talk about how

(23:06):
mutual funds create unexpected tax burdens for investors even when
their funds lose money. So when we dive into this
we're really kind of drilling down into the hidden costs
of tax drag and mutual funds, and how mutual funds

(23:26):
create unexpected tax burden for investors and even in years
where they've lost money. So we'll break down exactly what's
happening behind the scenes, why your tax bill might be
higher than you expected, and more importantly, what you can
do to protect your hard earned wealth from unnecessary taxation.

(23:49):
So stick around because this could be one of the
most important financial lessons that you hear all year. And
we often focus on how much money we're making and
how well our investments are performing, and whether our portfolio
is actually growing year over year, but many investors overlook

(24:10):
one of the biggest drains on their portfolio, and that's
tax drag. Now, taxes, they may not seem like a
big deal when your portfolio is growing, but when you
start adding up capital gains, distributions and the turnover ratio
and small term tax liabilities, you'll realize that when you

(24:31):
get done there, that what you kept is often far
less than what you would have earned. And the truth
is that mutual funds are built with a structure that
creates inefficiencies for investors because even when markets are down,
and even when your fund underperforms, and even when you

(24:55):
personally haven't sold a single share, you can still taxes
on the funds intern the internal trades. So mutual funds,
here's what we have here. Okay, mutual funds. They must
distribute realized capital gains to investors annually. This is why

(25:18):
you're getting your ten ninety ninths in these non retirement accounts.
So this happens when the fund sells stocks at a
profit inside of the fund and other investors redeem their shares,
which forces the fund to sell holdings to pay those
investors that are looking to redeem shares. So unlike owning

(25:41):
individual stocks, where ultimately you control when you sell and
take gains, the difference is that mutual fund investors are
at the mercy of fund managers and other investors. So
if someone else in your fund decides to sell their shares,
the fund must have to liquidate holdings to meet their

(26:02):
withdrawal request, which triggers capital gains for everybody that stayed
inside of the fund. So why does this hurt investors?
Because investors owe taxes on capital gains distributions even if
they didn't sell their own shares. Now you could be
holding onto shares for the long term and planning your

(26:24):
investments very carefully, and yet you're still hit with a
tax bill because the fund manager is making trades behind
the scenes and the fund could be generating some taxable
gains while the investors is at a loss. So you
might look at your statement and see that your mutual
fund actually lost money last year, only to get hit

(26:45):
with a tax bill for capital gains that you never
even saw. So let me give you an example. Let's
say you hold shares of a mutual fund that went
down by five percent for the year, yet you still
get hit with a capital gains tax bill because the
fund manager sold appreciated stocks inside of the fund. And

(27:06):
this is one of the most frustrating parts of investing
in mutual funds, and that's the tax burden is completely
out of your control. And this kind of scenario it
happens all the time, and it's one of the biggest
reasons why high net worth investors often move away from
mutual funds once they understand how this tax drag works.

(27:27):
So let's talk about another component here. Another major factor
here with mutual funds is tax inefficiencies and turnover ratio,
or how often a mutual fund is buying and selling
stocks inside of the fund. Well, some funds have turnover
rates well above fifty percent, and what that means is

(27:50):
that over half of the portfolio is bought and sold
within a single year. So why does that matter. Well,
a high turnover ration means that the fund is constantly
generating taxable events. And every time the fund manager sells
a stock at a profit, guess what, it creates a

(28:10):
taxable gain distribution that you are taxed on. Also, investors,
you may owe short term capital gains taxes as well,
which are much higher than long term capital gains tax rates.
So if a fund manager sells a stock that they've
only held for a few months, then that gain gets

(28:32):
taxed as ordinary income and that's often at double the
tax rate of long term long term gains tax rates.
So let me explain this a little bit further. Let's
keep going here with this tax drag. So let's say
that a mutual fund with a ten percent annual return

(28:54):
before taxes, Okay, that may only deliver a seven to
a eight percent after tax rate of return due to
the tax drag. So that's a twenty to a thirty
percent reduction in your after tax return simply because of
how that fund operates. So let's say, let's let's go

(29:16):
with another example. Let's say that a high turnover mutual
fund with a twenty percent turnover rate means that one
fifth of the fund is sold and replaced annually, creating
ongoing taxable events for investors. Well, if you're not aware
of your mutual fund's turnover ratio, then you could be

(29:36):
losing thousands of dollars each year in unnecessary taxes. So
what what do we want to look into here? Well,
remember we've been talking about this that a well managed
individual portfolio that is structured to minimize unnecessary taxation, allowing
you to keep more of your investment gains. And here's

(30:00):
how a managed account beats a mutual fund when it
comes to tax efficiency. What we can work on tax
lost harvesting. With a managed account, you can strategically sell
positions at a loss to offset capital gains. So when
the market takes a little dip to find time to
gather some losses, it will also help you lower your

(30:22):
tax bill. Well, mutual funds do not give you this control. Also,
there's no forced capital gains distribution. In a managed account,
your only taxed when you choose to sell investments. You're
not at the mercy of a fund's internal trading system. Also,
you get to control short term over long term gains,

(30:45):
so holding investments for more than one year. What that
does is it qualifies you for a lower tax rate.
And in mutual funds, short term gains can be triggered
by high turnover, which means again higher taxes for you.

Speaker 2 (31:01):
So the other.

Speaker 3 (31:03):
Component you want to pay attention to here is that
elimination of overlapping fees. And what that means is this,
and you've probably heard this said a thousand times, but
many mutual mutual fund investors they own multiple funds with
overlapping holdings, meaning that they're paying taxes on trades across

(31:24):
multiple funds instead of managing them in one cohesive strategy.
And if you look at the top ten holdings in
several any you grab any growth fund that's primarily focused
on investing in the US, the top ten funds are

(31:46):
pretty much the same, and pretty much all of the
mutual funds, I'll say a large majority of them. Okay,
just to give myself a little breathing room here, And
what that means is that if you have two of
these funds that are similar to one another, well, did
it makes sense to have the second fund? Probably not.

(32:06):
You probably could have accomplished the same thing with the
other fund or shaved one of them off the table here.
But that being said, at the end of the day,
the biggest difference between a mutual fund and a managed
account is control. Because with mutual funds, you're at the
mercy of those fund managers, like we talked about, you're
at the mercy of other investors, in addition to a

(32:29):
strict mandate that dictates how these funds must operate because
that's how they registered themselves, that's what they already sent out,
and that's what's written in their perspectives. Okay, So with
a managed account, you and your advisor can make customized
decisions based on your specific tax situation, your financial goals,

(32:53):
in addition to market conditions. So by now you should
have a pretty clear understanding of how mutual funds erode
returns through unnecessary taxation. And even if you think that
your investments are growing, tax drag is silently eating away
your profits. But here's the thing. This isn't the only

(33:16):
hidden risk that mutual funds carry. So while we've talked
about fund mandates and tax inefficiencies, there's one more major
issue that can seriously impact your wealth. And up next,
we're going to dive into one of the biggest investor misconceptions,
and that's the idea that diversification automatically means protection. While

(33:43):
many investors think that owning multiple mutual funds equals a
diversified portfolio, but in reality, you may be more exposed
to risk than you think. And we'll get to that
as soon as I get back from this break.

Speaker 4 (34:00):
His financial decisions don't have to be faced alone. Drew
Prescott at Prescott Private Wealth is here to guide you,
whether it's settling in a state, planning for retirement, or
making your final walk from your career into a well
earned rest. Don't let uncertainty weigh you down. Ask yourself,
did I do this right? Am I missing anything? With
Prescott Private Wealth, the answer is clear, You're on the
right path. Visit us at four or five to one,

(34:22):
Who's six Street in Troy, New York, or online at
PRESCOTTPW dot com. Prescott Private Wealth, your partner in navigating
life's financial journeys.

Speaker 3 (34:31):
Welcome back. So before I left you there, we were
talking about the biggest investor misconceptions, and that's the idea
that if you have your money diversified across different mutual funds,
that that automatically means protection. And I left you with
the line saying that you might be more exposed to

(34:53):
risk than you think. So we're going to unpack how
fund overlap, hidden fees, and asset allocation stakes could hurt
your financial future and what you should be doing instead.
So stick around because you're not going to want to
miss this. Okay, We're gonna get in. We're gonna get
into the weeds a little bit here. And this is,
like I said, I'm very excited to share this with

(35:13):
you because if you're hanging with me today, let me
tell you something. This lesson is a gem. This really
is this, This is what it's all about. This is
knowledge and action. Okay, and let me help you with that.
If you need some help, please call five point eight
two zero three one nine eighty three. Now we've spent

(35:35):
the show on covering these hidden risks of mutual funds.
We talked about the rigid mandates tax and efficiencies, and
how they can hurt investors without them even realizing it. Well,
now you might be thinking, okay, I get it, I
get it, I get it. Mutual funds have some serious flaws,
but what about ETFs? Aren't they a better alternative? So

(35:56):
the short answer to that is yes, ETFs, which stand
for exchange traded funds, are generally more flexible and tax
efficient than mutual funds, but they still have mandates as well.
So let's break it down. So, just like mutual funds,
ETFs are required to follow a pre defined investment strategy

(36:17):
which is outlined in their perspectus. So that means that
they still have rules that they must follow, including an
S and P five hundred ETF must hold the five
hundred stocks in the index weighted according to the index's methodology,
with no exceptions. Okay, now you have sector specific ETFs

(36:39):
such as information technology, healthcare, and they must invest only
in that sector, so even if market conditions start to
shift dramatically, they cannot abandon that plan. Now, if we
look at a bond ETF, which is show it's solely

(37:01):
focused on short term corporate bonds, they must stick to
that asset class regardless of changing interest rates, so here's
something to keep in mind. However, ETFs tend to have
fewer constraints than mutual funds, and that's because they do

(37:21):
not have to manage investor redemptions because investors buy and
sell ETFs on the open market, so the fund itself
is not forced to sell assets to meet these withdrawals,
which is a major tax advantage over mutual funds. Also,
they can adjust more easily, so unlike actively managed funds,

(37:44):
many ETFs passively track an index, which means that they
only make changes when the index changes, not based on
individual investment decisions. Okay. Also, they tend to be more
tax efficient because ETFs use an in kind creation and
redemption process that helps minimize capital gains distributions, and that

(38:08):
makes them far more tax efficient than mutual funds. So
that said, ETFs are not perfect and they still come
with some drawbacks for investors. So while ETFs offer more
flexibility than mutual funds, their mandates can still have teeth
and create some challenges. So what does that mean? They

(38:32):
have a rigid asset allocation and if an ETF is
designed to track an index or a sector, it cannot
shift out of it, even if that sector is underperforming.
So if tech stocks are crashing and you hold a
technology ETF, you're stuck writing it down. Additionally, there's a

(38:54):
lack of risk management. Passive ETFs do not adjust for
risk the way that an actively managed portfolio mite because
they simply follow the index even when it does not
make sense. And then another component to ETFs is hidden overlap. Now,
investors who buy multiple ETFs may unknowingly hold the same

(39:17):
stocks across funds, reducing actual diversification and increasing exposure to
certain companies. And let me give you an example of that.
So a common mistake that I see is investors buying
an S and P five hundred ETF, a large cap
growth ETF, and a tech ETF thinking that they are diversifying. Well,

(39:41):
in reality, they pretty much own a lot of the
same companies like Apple, Microsoft, and Amazon, and that makes
them over concentrated in certain areas of the market without
even realizing it. So if ETFs have mandates, too, what
is the best solution. Well, if you're looking for maximum flexibility,

(40:05):
tax efficiency, and true customization, the best option is a
managed account with individual securities. So how does a managed
account give you more control. We're going to cover these
that along the same bullet points that we just covered.
Mutual funds and ETFs. Well managed account gives you more

(40:28):
control because you're not forced to follow a rigid strategy,
because you can adjust your holdings based upon market conditions,
economic trends, or even your own personal risk tolerance, and
you can call me and we can make that change
just like that. And you can control when you take
your gains and when you take your losses. So tax

(40:50):
loss harvesting can help offset these taxable gains, unlike mutual
funds and ETFs, which make distributions that you cannot control. Okay,
you can avoid these redundant holdings that we're seeing in
mutual funds and ETFs as well by having a managed
to count because instead of unknowingly overlapping positions across multiple ETFs,

(41:14):
you can build a truly diversified portfolio. And at the
end of the day, the key difference between ETFs, mutual funds,
and a managed portfolio comes down to one word, and
that word is control. And mutual funds give you the
least control with rigid mandates, forced capital gains, distributions, and

(41:38):
high fees. Now ETFs. They offer some control, but they
still have constraints and can lead to unintentional overlap and
exposure risks. But a managed ac count gives you the
most control, with the ability to customize investments, manage taxes,

(42:00):
and adjust your portfolio as needed. So we've covered a
lot today, and I hope that if you've stuck with me,
that you feel like this has been a great use
of your time. I know that as I prepared this,
I thought, you know something, this is This is a
real dandy of a show. This is a great show.

(42:21):
This is a great lesson, and I hope that you
have the uh, the ability to realize that this here
is just oozing knowledge and this is something that you
want to get your arms around. And you may be
sitting here thinking, boy, this is overwhelming. Well that's okay
if you think that, Okay, that's what I'm here for.

(42:43):
My job is to take the complex and make it simple,
or at least serve it to you in a way
that is digestible. Okay. If you have an advisor that
you haven't talked to for a couple of years, or
if you haven't advisor that maybe started off in the
insurance world, and then they're just selling your mutual funds.

(43:08):
Call me. If you don't have a financial plan in place,
call me. If you don't have individual stocks in a
managed portfolio, call me. I want to meet with you.
If your portfolio has five hundred thousand dollars or more invested,
I would like to offer you a consultation to go

(43:32):
through a comprehensive review of your portfolio. Share with you
any overlapping holdings, the fees, where they're coming from, what
they mean. I want to talk to you about your alpha.
I want to talk about the beta inside of your
portfolio and the tax drag. Let's see if there are

(43:54):
inefficiencies there that we can address that we can just
simply use the same parts that you have, which are
your assets, and us just tune them up some. Okay.
And I remember when I was a kid, my brother
and I and our friends always used to race mustangs

(44:16):
and we had such fun with it. Those were great days,
and it was really amazing when you would go to
Lebanon Valley or one of the quarter mile strips and
there were some fellas out there that could just test
and tune a car and just make all the difference
in the world, and it was really remarkable some of
the stuff.

Speaker 4 (44:37):
That they would do.

Speaker 3 (44:38):
You know, they just they knew the exact higher pressure
that they needed, they knew the fuel ratio that they wanted,
the proper spark and all these all these little things
come into play, and they could take a stock car
and they could tweak it and make some adjustments and
just have the same tuned properly, and they could shave

(44:59):
you know, pretty significant amount of time off they're quarter
mile time. And so that's what I look to do
for you, Okay, I want to help you fine tune that.
Let's see if we can get more juice out of
this fruit for you, and I believe that I can.
I'll tell you I have met with, you know, thousands
of people over my career, and there may be a

(45:23):
handful of individuals. Yeah, it's probably let's just say it's
a dozen, okay, but you know it's few and far
between that I meet somebody that I couldn't help improve
their pictures some And you know, my pride's not too
big to say, you know what, your advisor is doing
a fantastic job and just keep going. It looks wonderful.

(45:45):
That's my commitment to you, I will tell you that
I only want to see people do well. Okay, I'm
not one of those guys that sits on the sidelines
and wants to see somebody fall off a ladder. So
if you're sitting there and you're thinking, you know, I, oh,
I'm doing good. I've been set up the same way
for a long time. I've had an advisor for many years. Well,

(46:08):
let me just say this. I believe you you're probably
doing pretty well. And a lot of the clients that
I take on, well, I can't say a lot of them,
I'll say, unless they're young, they all have a financial advisor. Okay.
Seasons change, people change, and if you are in a

(46:31):
place where you feel as though you'd like to have
a fresh relationship, or maybe you're looking for a younger advisor. Thankfully,
I still have what I would consider youth on my
side at age forty seven, and I plan on doing
this for a good long while. So if you're getting
close to retirement, perfect, I'll be here through your retirement.

(46:55):
If you're my age, fantastic, I will be able to
work with you and transition you to the next generation.
So I am I'm at a really a wonderful age.
And I have no problem saying that. I remember being
a young man in this industry, and when you're young,
people have a hard time. I think they respect you

(47:16):
because you're you know, you're confident enough to make the
call and ask for the appointment, and then when you
show them what you can do, they become a little
bit more impressed. But then there's some times that people say, yeah,
but he's not seasoned enough yet. He hasn't lived through
life enough to really appreciate how hard it is to

(47:37):
save this money, or you know, he doesn't even have
a mortgage or whatever. Well, thankfully, you know, I'm pretty
well experienced in life. I had a mortgage when I
was twenty one. I bought my first home at twenty one,
and so now I think about that today. My son
is twenty one and he is selling cabinets over at
Cabinets to Go on Central Avenue. And so if you're

(48:00):
in the market for a new kitchen, look him up,
give him, give him an opportunity. If you wouldn't mind,
that would be fantastic. He would love that. And tell
him that I sent you in all right, And they
got a nice little group of fellas over there that
are designing the kitchens and everything, and my wife and
I are going to use them. Always like to keep
the business in the family. It's important. It's something that

(48:22):
I really want to focus on growing inside of my children,
and so any support you could give him would be
greatly appreciated. But the reason that I was talking about
my son, I kind of went down a little bit
of a rabbit hole here, But just saying that, at
twenty one years old, I remember having my own mortgage,
and you know, growing and learning some tough lessons financially

(48:46):
and not only personally but in business relationally. But I
can tell you this at forty seven years old with
three children or youngest one fourteen or oldest one twenty one.
My wife and I now being married since two thousand
and two, puts things into perspective a bit. Seeing some

(49:07):
friends get sick going through some major surgeries. I just
want to say, if you heard me in the past,
I was talking about my friend Tommy Dolan. Tommy's in
this industry as well, young man. I love this kid.
He's become a dear friend to me and I love
him very much. And he went through some cancer treatment

(49:32):
and went through a surgery where they had to remove
a tumor off of his brain stem, and this was
down at Sloan, kidding, and they removed ninety percent of
the tumor, which was just such a gift from God,
and then they were going to start this proton therapy.
And what had happened was the doctor said, I want

(49:52):
to get another look at it. If I can commit
from a different angle, I may be able to get
the rest of this out. And we were just praying
for him, and you know, glory to God, they were
able to remove one hundred percent of this and even
get rid of some scarring from the last surgery. I mean, boy,
you know, I listened to a fella give a national

(50:14):
talk one time and it just he said this. You
probably heard me say it before, and I apologize. I've
only got a few stories that I share, but he
said this thing, and it always resonated with me and
I'll never forget it. What he said was he said
that life is beautiful and sometimes we just don't like
it that way. And that came from a man that

(50:35):
got into a car accident and he was driving an
old Groom and Olsen truck. So you think of like
kind of like a ups truck with a smaller one,
you know, usually like electricians used to drive them. Man,
these things just they look like tunic cans on wheels, right,
that's how thin the metal is. On the highway, someone

(50:56):
cut off another car. It hit the front of his truck.
The thing went, you know, end over end, and the
sheathing came off and it cut the side of his
face right off. He got so busted up. He was
in the hospital for about eighteen months getting different surgeries
and everything. And he talks about and again, this is

(51:17):
another fellow that's in my industry. Boy, we are resilient people.
I will say, I'm very proud of the people that
I work with and other advisors in this industry. It's
a very tough industry. Last time I knew, I was
only nine percent of those that start in the industry
actually succeed in making it past the third year. So
I'm proud to say I'm a survivor. And this man

(51:39):
tells us just incredible life story. And he says life
is beautiful and sometimes we don't like it that way,
And isn't that the truth? Life is so beautiful? And
I want to help you on the financial side of
this journey. So you know, sometimes we wake up in
the middle of the night and you know, we get

(52:00):
a little harpalputation or we get some heartburning. There's just
things that are weighing heavy on us. Well, if you
find that there's a financial topic that's weighing heavy on you, okay,
and you know, maybe you don't have five hundred thousand dollars, Okay,
maybe you're just getting started or whatever. Listen, I started
in this business because what had happened inside of my

(52:24):
own family. Let me share this story with you here,
and I forgive me if you don't like me being personal,
but I think it's important from time to time. Okay. Well,
my father in law, who was Bob Weatherwax, if you
knew him, you would know he was just a fantastic guy.
I loved him dearly. Not only was he my father

(52:45):
in law, but he was one of my best friends
and I miss him to this day. Well, he died
he turned fifty three on his deathbed at the hospital,
and he was in there for twenty some odd days.
And when he was in the hospital, the whole family

(53:07):
was away, and there was one day that I came
home and I just needed to get away from it all.
And I opened the mailbox and he hadn't sent in
his premium for his insurance, for his life insurance, and
I remember the exact amount, and I called them up
and I said, can I send in a check overnight

(53:29):
and if you receive it, will you will this policy
be enforced? And they said yes. So I sent a
check and by the grace of God, everything cleared prior
to him passing away. And that death benefit was so
impactful to my mother in law and my youngest brother
in law, and I remember thinking how good it felt

(53:53):
to be part of that. And then I always had
life insurance for myself. But then I I thought, how
amazing would that be to be able to help other
families in the situation. So I go back to the
point that if you don't have five hundred thousand, that's okay.
Reach out to me if you need help, if you're
staying up at night, because if you'll sick your stomach,
call me. I will help you. Okay. So thank you

(54:15):
so much for listening to your money matters. I'll be
back here next Sunday, eleven am on Radio eight ten
and one oh three one FM. And until then, thank
you for listening. God bless America and God bless your family.

Speaker 4 (54:28):
At Prescott Private Wealth, we understand your financial picture is unique.
Don't get lost in the noise of mixed advice. Visit
us at four or five to one who Sixth Street
in Troy, New York, or online at PRESCOTTPW dot com.
Led by Drew Prescott, our team offers comprehensive solutions from
investments and retirement plans to risk management around insurance and
estate planning. At Prescott, we're fully licensed to safeguard and

(54:50):
grow your wealth. Prescott Private Wealth where your financial future
is secure. Visit PRESCOTTPW dot com today.

Speaker 2 (54:58):
Where is it that they know what it says? You
never be?

Speaker 1 (55:08):
Stay in your dreams.

Speaker 2 (55:11):
Don't them stinging dissy if you want to stay