Question Advisor's Emergency Fund Setup

[green_goblin12]

My former advisor set up our emergency fund that was divided accordingly when I closed the account:

20% Cash (money market)
15% Asset Strategy fund A shares (5.75% load, 1.14% expense ratio)
15% High Yield Muni Bond C shares (1.78% expense ratio)
50% High Yield Muni Bond B shares (3.0% deferred load when sold, 1.88% expense ratio)

I'm looking for some feedback because I have some serious questions about this account and am wondering about filing a complaint. I opened this account before I knew about junk bonds, mutual fund share classes, and really much of anything about investing.

1. Shouldn't an emergency fund be low-risk? Are high yield (ie. "junk") bonds with about 75% of the bonds rated below "A" quality (nearly 50% not rated) safe for an emergency fund?

2. The B-shares portion were actually a "car fund." He knew we would likely need a car in the next 5-7 years. The deferred sales load went to 0% after 7 years. Why would he put this portion in B shares if there was a pretty high chance we'd need those funds before they converted to A shares? I cut my losses when the load was 3%, but that amount was less than waiting another 3 years until they converted with that high of an ER.

3. Why C shares at all?

I brought up some of these issues but he downplayed them and added to my confusion. I know I was had with those loads and high expenses. I know better now. The overall account was pretty much a wash in the end. So I wouldn't say I lost money, but I wished I had known better. Lesson learned.

[kork13]

Holy smokes, I'm glad you said this guy was your "FORMER" advisor! How could he sleep at night giving you something like that for an emergency fund?!? The only one of those investments that was appropriate for an EF was the money market fund. Junk bonds?!? No way!

To put it bluntly (and especially in light of this statement): "I brought up some of these issues but he downplayed them and added to my confusion." ....his recommendations to you were completely unethical, and designed exclusively with his own interests at heart... he probably made a VERY healthy commission off of your emergency fund. Exactly what was his certification? Depending on his qualification, advisors have the legal obligation to give recommendations that are in the person's best interests. It's hard to prove an advisor acted unethically (there's alot of wiggle room for them), but I would still strongly consider filing a complaint.

[Petunia 100]

You're not going to get anywhere complaining about the high loads in A, B, and C shares. That is how the advisor is paid and you have to do the paying. However, I think you have a legitimate gripe about your emergency fund being invested in junk bonds. That is not prudent. Your advisor is supposed to keep your objectives in mind and sell you appropriate investments. I suggest you contact the company he worked for and express your dismay about being sold inappropriate investments for your objectives.

[snafu]

There is a 'know your client' responsibility for the adviser. What did you tell the adviser or fill out on the form? How secure is your employment? What type of emergencies do you anticipate as likely? What did you choose for your EF?

[jpg7n16]

Well how many months did the 20% represent? Did you have outside cash holdings also?


If a client comes to me and asks for guidance on 3 years of expenses that they claim is their "emergency fund," it's not all going to be in cash. By definition, you can't use 3 years of expenses in 1 year. So a portion needs to be invested longer term.

Or if they ask for assistance with their investing and tell me they already have 3-4 months expenses in cash at their bank, I'm not gonna recommend an additional 6 months expenses in cash at our firm without a really good reason to do so.

Part of the funds should be invested in something other than cash, because it's honestly best for the client.

Does that mean high-yield munis are the way to go? Not neccessarily. And you didn't tell us the duration of those high-yield muni funds. Were they long term? Short term?

We don't do loaded funds, but in general
C shares are short term holdings
B shares are mid term holdings
A shares are long term holdings

So if that's all he has to work with at his firm, he put you in a portion immediately accessible at any time w/o fee or expense, a portion accessible short term w/o penalty, the majority invested mid term, and a small portion of long term holdings. Sounds about right for someone looking to boost returns on their EF money. Just not preferrable that he had to use A, B and C shares to do it.

[green_goblin12]

Well how many months did the 20% represent? Did you have outside cash holdings also?

Cash portion was about 2 months worth. We started with that and once we hit 2 months we started new funds. No other cash holdings.

Part of the funds should be invested in something other than cash, because it's honestly best for the client.

Agreed. Bond funds aren't bad for an emergency fund. It was a bond fund, but the average maturity was 21 years.

Like most bond funds the past few years, they performed well. But that doesn't seem like a long-term strategy with these types of junk bonds. I didn't hang around to see his strategy when interest rates rise. But with the loads and expenses, like I said, it was pretty much a wash. So I don't have much of a complaint that I lost money.

[green_goblin12]

There is a 'know your client' responsibility for the adviser. What did you tell the adviser or fill out on the form? How secure is your employment? What type of emergencies do you anticipate as likely? What did you choose for your EF?

I wasn't afraid of risk, on my investments. To me, and emergency fund isn't really an investment. Employment pretty secure. Emergencies would be typical things like health emergency, car/home repair, those sort of things.

I understand wanting to get more return for my money, rather than sitting in a MM fund, but risk tolerance for an emergency fund should be low. So some miscommunication on that part--I should have asked more questions.

The selling of B & C shares still seems inappropriate, but I'm sure he had a reason. So many people put trust in financial advisors and brokers, but really at the end of the day it is about them making the most money (your money.)

[snafu]

An investor should be asking questions like these from anyone who is given the responsibility of looking after your money.

1. How are you paid? Are you earning a commission on each transaction? or?
2. Can you do better on commission charge? [FP have significant flexibility on larger trades]
3. What are your qualifications? Look at the certificates on the walls
4. What are you registered to sell? [some sell only MF or wares of only one company] [nope]
5. What do you have in your portfolio? [variations on age]
6. How will I hear from you? [monthly newsletter, bi annually, changes in market conditions?]
7. How long have you been an adviser? [have they managed in a bear mkt?]
8. I'd like 2 references who have similar situation who might be willing to talk by phone
9. Who watches you? [supervisor if you have serious concerns]
10. Who back you up? Am I protected by an industry run insurance or gov't legislation?

It's important to have a good foundation to build a lasting relationship.