Advisor advising closed-end funds — why?

[Boomer]

I don’t have any closed-end funds and probably never will. And I do not have an advisor — at this time. But…..

I knew nothing about closed-end funds so I did some reading. I have a very basic understanding now but could use more insight. What’s this leverage thing all about (sounds a bit risky to me) and are there expenses beyond the stated expense ratios? (I get the feeling there are more expenses to decipher.)

Can an advisor be collecting from a closed-end fund in addition to a flat AUM fee?

Why would an advisor use closed-end funds over open-end funds and/or index funds? (I understand those.)

So? What am I missing?

Boomer

[Karadad]

Run away! Bad advice!

[Boomer]

Run away! Bad advice!


That’s what I thought, but I need specifics on why the advisor is advising CEFs.

This really is an “asking for a friend” question because a friend asked me. I have read several articles that define closed-end funds, but I keep circling back around to a big fat WHY?

We cannot control the market, but we can control the expenses of investing.

Even though there are those who will say not to worry about expenses because it is “the fund” that is paying the expenses, I cannot get my head around that one because doesn’t the fund get the expense money from the investor?

Boomer

[manaboutown]

I have held two closed end funds for almost 40 years. A purchase price advantage exists when one trades at a discount to the value of its portfolio. Mine have beaten their indexes by a small margin and pay nice dividends and LTCGs. Yes their expenses exceed those of Vanguard index funds but they have provided a small margin of performance ahead of their indexes. Caveat: They comprise only a small portion of my portfolio as do REITs which I hold for their dividends.

Closed end funds are bought and sold like common stocks so can be purchased and sold "commission free" at Schwab, Fidelity and Vanguard.

[LuvtheVillages]

I do not invest in closed end funds - but here is what I know.

In open ended funds, the share price is the total value of the fund, divided by the number of shares. If you pay $1, you get about $1 worth of assets.

In closed end funds, the share price is determined by the market. Some of these funds trade at a premium - For example, if you pay $1 for a share, the underlying assets may only be worth 80 cents. NEVER buy these funds.

In some other closed end funds, the share price might be at a discount to the underlying assets. For example, if you pay $1 for a share, the underlying assets may be worth $1.20. Some people like to buy these because they think that eventually the share price will catch up to the asset price and they will make a profit. I think they may wait a long time for that to happen. Also, maybe the underlying assets are having problems that are not yet widely known. Or, any number of reasons. It's a risk.

As to whether your advisor earns a commission by selling these, ask him/her directly. It can vary.

[retiredguy123]

I am not an expert on closed end funds, but the main question to ask the advisor is whether the shares he/she is recommending are part of the IPO (initial publc offering) or are they shares that are being resold. If they are part of the IPO, I don't think there is any question that the advisor is selling the shares to make a large commission, and maybe even an additional incentive payment or reward. One of the reasons that a company starts a closed end fund is so they can raise money quickly by engaging a select number of financial sales people to "push" the fund to their regular clients. Once the IPO shares are sold, no more additional shares are ever created, which is why it is called a closed end fund.

As far as the investment potential, I don't see any advantage to the investor in buying a closed end fund versus an open ended fund.

[LuvtheVillages]

As far as the investment potential, I don't see any advantage to the investor in buying a closed end fund versus an open ended fund.

I just explained the advantage for some of these funds - If the closed end fund is trading at a discount to its Net Asset Value, you can buy a dollar's worth of stocks for less than a dollar.

The risk is time - you don't know how long it will take for the market value to adjust to NAV, if it ever does. All investments have risks.

[retiredguy123]

I just explained the advantage for some of these funds - If the closed end fund is trading at a discount to its Net Asset Value, you can buy a dollar's worth of stocks for less than a dollar.

The risk is time - you don't know how long it will take for the market value to adjust to NAV, if it ever does. All investments have risks.
Thanks. I'm not sure if I fully understand the advantage, but I'll think about it.

[Caymus]

I don’t have any closed-end funds and probably never will. And I do not have an advisor — at this time. But…..

I knew nothing about closed-end funds so I did some reading. I have a very basic understanding now but could use more insight. What’s this leverage thing all about (sounds a bit risky to me) and are there expenses beyond the stated expense ratios? (I get the feeling there are more expenses to decipher.)

Can an advisor be collecting from a closed-end fund in addition to a flat AUM fee?

Why would an advisor use closed-end funds over open-end funds and/or index funds? (I understand those.)

So? What am I missing?

Boomer

Did they mention any names? I would be curious to check performance.

[rsmurano]

2 problems with the original posters question;
You are paying an advisor and you are buying a managed fund.
As for expenses, all expenses are more than what’s stated and the managed fund is always much more than an index fund. Check the turnover rate for a managed fund, I’ve seen them in the 400% range because the manager is always trying to make the fund better, and you pay for this at tax time.

How the Expense Ratio Is Calculated

The costs that go into an expense ratio vary greatly from fund to fund. But most expense ratios include outlays for fund management, marketing, recordkeeping, administration, compliance and shareholder services. With many mutual funds, a 12b-1 fee, which covers a fund’s marketing and distribution costs, makes up a large proportion of the expense ratio.

The fees are bundled into a ratio that is expressed as a percentage of your total assets with that fund, and deducted from the net assets on an annual basis. For example, a fund with $1,000 might have an annual expense ratio of 1%, meaning that $10 is deducted from your account to cover costs every year.

Some of the fund’s costs are not included in the expense ratio, such as sales commissions paid to a broker who sold you the fund (these are referred to as loads), or trading commissions and account services fees. These are classified as debits, and they are listed on account statements.

You can find the expense ratio for a fund when comparing funds on a brokerage site, as well as on the fund’s prospectus. They aren’t typically listed in your account statements, though.

Mutual Fund Fees & Expenses-Fidelity (https://www.fidelity.com/learning-center/investment-products/mutual-funds/fees-expenses)

Access Denied (https://www.cnbc.com/select/expense-ratios-what-are-they-and-why-are-they-important/)

Mutual Fund Fees: A Guide for Beginners - NerdWallet (https://www.nerdwallet.com/article/investing/mutual-fund-fees-what-investors-need-to-know)

ETFs: How Much Do They Really Cost? | Charles Schwab (https://www.schwab.com/learn/story/etfs-how-much-do-they-really-cost)

[Ducatigator]

Good morning. Closed end funds serve a purpose in a portfolio. The discussion should not be based on closed end versus open end. It should be based around "in addition" to a portfolio for diversification with the potential for more yield. Closed end funds have actually been around longer than open end funds. They trade more like a stock on the open market then a typical mutual fund.

The advantage is for the fund manager. What he/she can do to invest and not worry about large in flows of cash or large redemptions which actually puts a strain on open end fund managers. They can also use leverage, issue preferred stocks to enhance yield and or capital.

Do you buy 100% in closed end funds, not likely. Can you buy a percentage of closed end funds for diversification, maybe. The only person that decides that is between you and your professional advisor. Ask him/her why the recommendation, how it benefits you, what are your risks etc.. if you are comfortable with the answers then you have a decision to make. If you are not, walk away, take your time and make an informed decision.

Fyi, the advisor makes a commission or is managing your portfolio for a fee. Not both. Regardless the advisor, an investment firm, even Schwab/Fidelity, make money from providing investments to investor. Nothing in this world is free ������. Price/cost is only an issue in the absence of value.

Hope that helps.

Have a great weekend.

[crash]

That’s what I thought, but I need specifics on why the advisor is advising CEFs.

This really is an “asking for a friend” question because a friend asked me. I have read several articles that define closed-end funds, but I keep circling back around to a big fat WHY?

We cannot control the market, but we can control the expenses of investing.

Even though there are those who will say not to worry about expenses because it is “the fund” that is paying the expenses, I cannot get my head around that one because doesn’t the fund get the expense money from the investor?

Boomer
The stated dividend is after the expenses are paid. So if the fund says 6% dividend they have taken their fees before declaring that thus the fee comes out of the fund not what you will get paid.

An advantage of a closed end fund is that they can trade below NAV so you could be getting $1.00 of assets for less than a dollar. An index fund and open fund trades for NAV.

[MikePgh]

Closed End funds and Front End Load funds usually also charge what is known as a 12-b1 fee. The fund companies and those advisors who utilize those funds sometimes refer to that as an advertising fee.

The fund company will pay that to the advisor or broker who puts their clients in those funds.

So not only is the advisor charging you a fee based on the assets they manage for you, but they are also sharing in the expenses the fund company collects for managing the fund.

[crash]

I just explained the advantage for some of these funds - If the closed end fund is trading at a discount to its Net Asset Value, you can buy a dollar's worth of stocks for less than a dollar.

The risk is time - you don't know how long it will take for the market value to adjust to NAV, if it ever does. All investments have risks.

If it doesn’t adjust to NAV you still have been paid a good return from the dividend. Most of these funds pay 6% or more. These funds are more about income then capital gains.

[Ecuadog]

This is a fund screener that I use for my closed-end fund research.

CEF Connect... click here (https://www.cefconnect.com/closed-end-funds-screener).

[CFollansbee]

My advice: go talk to an advisor. With no disrespect to those who have posted, unless they are retired advisors/fiduciaries they may or may not be completely correct in their statement. Let me recommend my fiduciary, David Blackston. Extremely knowledgeable, kind, and a genuinely nice person. If you can’t see him, his son Kyle is in the firm and a few others. An adviser will look at your entire portfolio and give you advice as to your money and growth. Yes, there is a fee but that is their job and I am fine with that. I have been 100% satisfied with them for the last 7 years. Blessings.

[jimjamuser]

My advice: go talk to an advisor. With no disrespect to those who have posted, unless they are retired advisors/fiduciaries they may or may not be completely correct in their statement. Let me recommend my fiduciary, David Blackston. Extremely knowledgeable, kind, and a genuinely nice person. If you can’t see him, his son Kyle is in the firm and a few others. An adviser will look at your entire portfolio and give you advice as to your money and growth. Yes, there is a fee but that is their job and I am fine with that. I have been 100% satisfied with them for the last 7 years. Blessings.
My advice is to put the money into an ETF. Forget ALL "advisors" and "managed" funds. The basic S + P ETF has always outperformed "managed" funds. The PRESSURE to manage the funds causes bad decisions and excessive buying and selling.

[Ecuadog]

... Most of these funds pay 6% or more. These funds are more about income then capital gains.

Bingo.

[spinner1001]

I just explained the advantage for some of these funds - If the closed end fund is trading at a discount to its Net Asset Value, you can buy a dollar's worth of stocks for less than a dollar.

^^^

*This* is the main motivation for a buyer of a CEF. Looking for a bargain price from mispricing.

The biggest disadvantage for a typical buyer of a CEF is less liquidity than traditional mutual funds.

Looking for a bargain of a CEF share price does not mean it is actually a bargain. The price discount may reflect a illiquidity discount of rational investors rather than mispricing.

If you are looking into a CEF, look at the fund’s trading volume and not just the price to net-asset-value ratio. If you own CEF shares, will be be able to sell them quickly without a discount?

[spinner1001]

If it doesn’t adjust to NAV you still have been paid a good return from the dividend. Most of these funds pay 6% or more. These funds are more about income then capital gains.

The bigger dividend yield of say 6% mainly happens because of a CEF’s typical discounted share price.

For instance, suppose a traditional income-oriented mutual fund pays dividends of $5 (per fund share) and the fund’s shares trade for $100. A buyer of one fund share earns a 5% dividend yield.

$5 / $100 = 5%

Now, suppose an otherwise identical CEF holds the same underlying investments and the CEF shares trade at a 20% discounted price compared to the traditional fund’s shares — it trades for $80 rather than $100. The CEF investor still gets $5 per share in dividends on their $80 investment — about a 6% dividend yield.

$5 / $80 ~ 6%

A CEF produces a higher dividend yield that an otherwise identical open-end mutual fund because its shares trade at a discount. It’s math.

But if investors are rational, why would CEF sellers accept a $80 share price when an otherwise identical open-end fund trades at $100? Perhaps buyers require a illiquidity discount on the CEF shares. Or the sellers at $80 are not actually rational.

[Boomer]

Thank you to all who have posted in this thread. The information you are providing to me is helpful. I had read about CEFs, but I often find that a little informal conversation can shed more light on a subject.

I do not own any CEFs. My friend does. Her advisor is with one of the giant wirehouses and she has been with him for a few years.

She does not ask questions. But she asked me to look at the report. I think I am going to give her a list of questions to ask the guy when they meet. Everything might be just fine, but she needs a lot of clarification on what she owns and why — and where the costs and fees are. (She will probably want to drag me along with her. . .He will not like me, although I will be all dressed up and charming and will smile my very best smile.)

Why is it that so often the people who are the smartest, especially in one field, do not like to ask questions? She is super smart.

Next question: If she decides she likes her CEFs, after the questions are answered, and she wants to keep them — but also then decides that her advisor is a weenie, can CEFs be transferred in-kind to a different advisory firm? (I know that probably depends on how proprietary the funds are.)

Boomer

[retiredguy123]

Thank you to all who have posted in this thread. The information you are providing to me is helpful. I had read about CEFs, but I often find that a little informal conversation can shed more light on a subject.

I do not own any CEFs. My friend does. Her advisor is with one of the giant wirehouses and she has been with him for a few years.

She does not ask questions. But she asked me to look at the report. I think I am going to give her a list of questions to ask the guy when they meet. Everything might be just fine, but she needs a lot of clarification on what she owns and why — and where the costs and fees are. (She will probably want to drag me along with her. . .He will not like me, although I will be all dressed up and charming and will smile my very best smile.)

Why is it that so often the people who are the smartest, especially in one field, do not like to ask questions? She is super smart.

Next question: If she decides she likes her CEFs, after the questions are answered, and she wants to keep them — but also then decides that her advisor is a weenie, can CEFs be transferred in-kind to a different advisory firm? (I know that probably depends on how proprietary the funds are.)

Boomer
The answer to your question is yes, unless the CEF was started and is directly managed by the advisor's company. In that case, she can still keep the fund and have another company track it, but the original company will still be managing the fund and receiving the built-in fees. It would be like transferring your assets from Vanguard to Fidelity, when you own Vanguard mutual funds. Fidelity will track the Vanguard funds in a Fidelity portfolio, but Vanguard will still manage the fund.

[Boomer]

The answer to your question is yes, unless the CEF was started and is directly managed by the advisor's company. In that case, she can still keep the fund and have another company track it, but the original company will still be managing the fund and receiving the built-in fees. It would be like transferring your assets from Vanguard to Fidelity, when you own Vanguard mutual funds. Fidelity will track the Vanguard funds in a Fidelity portfolio, but Vanguard will still manage the fund.

Thanks. Ironically, I just bought a Vanguard fund on the Fidelity site. I had never seen that before. It surprised me to see it there.

Boomer

[retiredguy123]

Thanks. Ironically, I just bought a Vanguard fund on the Fidelity site. I had never seen that before. It surprised me to see it there.

Boomer
Note that individual stocks are not like mutual funds. You can transfer specific stocks from one broker to another and there is no taxable event. But, if you sell the Vanguard S&P 500 index fund and substitute the Fidelity S&P 500 index fund, it is a taxable event, even though the two funds are very similar in the stocks they contain. That is why both companies allow you to hold the other company's funds in their portfolio.

[spinner1001]

Why is it that so often the people who are the smartest, especially in one field, do not like to ask questions? She is super smart.

“The more you know, the more you realize how much you don’t know. The less you know, the more you think you know everything. Knowledge is humbling. Ignorance is arrogant.”

[retiredguy123]

“The more you know, the more you realize how much you don’t know. The less you know, the more you think you know everything. Knowledge is humbling. Ignorance is arrogant.”
I agree. Too many people make the mistake of buying investments without knowing what they are buying.

There is a guy named Ty Young, who sells annuities on television, but he never calls them annuities. He does not want you to know what you are buying.

[Boomer]

Note that individual stocks are not like mutual funds. You can transfer specific stocks from one broker to another and there is no taxable event. But, if you sell the Vanguard S&P 500 index fund and substitute the Fidelity S&P 500 index fund, it is a taxable event, even though the two funds are very similar in the stocks they contain. That is why both companies allow you to hold the other company's funds in their portfolio.


Thanks, retired guy123. I wondered how that works. Makes sense from a marketing standpoint. Vanguard is so famous for Bogle’s long ago wide implementation of index funds that by making some Vanguard available, Fidelity investors can stay put and still own a Vanguard.

I have been having a little fun (yes, I said fun. :)) looking at the Fidelity Select Index Funds — something for everybody there.

I was also rather intrigued to see a category called “Disruptive Funds”….. maybe those should be called FOMO Funds.

Psychologically speaking, Disruptive Funds could provide a way to gamble on the future of innovation — scary as some of that can be — without taking a big gamble on an individual stock. There are disruptive funds that are select and there is at least one that includes all types of innovation.

I am not the type of investor who would put a lot of money into “new fangled” stocks, but might have to put a few bucks into one of these disruptive funds — and I do mean a few bucks, very few, just to have some fun. (I do find the word ‘disruptive’ to be a bit disconcerting though. :))

I know a guy who lost his shirt and probably his pants by throwing a lot of money into crypto. He was retired — “was” is the operative word there.

Boomer