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Mutual Funds

In the age when markets are becoming increasingly accessible to individuals seeking short term positions and a rise in volatility, long-term investors who seek stability are rediscovering the old reliability of diversification and large well-managed funds.

Mutual funds pool money from many investors and put that aggregate amount into a variety of assets. Each investor owns a share of the mutual fund. Investors large and small thus have access to the same investment opportunities.

Although mutual funds are generally safe investments geared for the long term due to their size and diversification, not all mutual funds are created equally. Mutual funds come in many forms. Their popularity has produced a wide array of funds to suit investors’ goals.

One of the basic distinctions between mutual funds is the weighted balance between equities and debt. Funds focused on stocks, for example, are generally split between growth and value profiles which both seek capital appreciation. Growth funds invest heavier in large and reliable companies that are expected to gain in their share prices due to strong financial fundamentals. Value funds, on the other hand, look for companies that are expected to gain in share price because they are trading at a discount. Funds are additionally available, blended anywhere between growth and value.

Mutual funds weighted towards stocks may focus on companies with either large or small market capitalizations affecting risk levels and returns. Small market capitalization companies, or “small caps,” experience higher volatility while large market capitalization companies, or “large caps,” enjoy more stability. Small caps will rise quicker and fall quicker relative to their large cap counterparts. Thus, risk levels and investment goals heavily implicate whether small or large cap funds are better investments for the individual investor. Investors seeking larger returns and are willing to take on greater risk may prefer small caps. To the contrary, investors who prefer stability and less risk may look towards large cap mutual funds.

Additionally, mutual funds often target specific goals. These funds may invest geographically, focusing on companies from particular areas around the world to take advantage of emerging markets. Funds also target particular years for retirement. Investors who seek to invest for retirement can find mutual funds targeting their expected retirement year.

Many mutual funds are weighted towards bonds rather than stocks. Investors may choose from funds focusing on municipal bonds, state-specific bonds, treasury bonds, corporate bonds, high or low yields (correlating with risk), long or short maturities, among others.

Given the wide variety of mutual funds, investors should work closely with their investment advisors to choose funds that match the investor’s goals and risk appetite. Investment advisors have a duty to understand the funds they recommend and to understand which mutual funds are suitable for their clients. This is a fiduciary relationship subject to FINRA and SEC regulation. Factors required for consideration into a client’s suitability for investment recommendations include the investment objectives, investor’s financial situation and needs, investor’s experience, investment time horizon, investor’s age, investor’s other investments, tax status, liquidity needs, and risk tolerance. FINRA Rule 2111.

Furthermore, suitability is not judged by ultimate profitability of the investment but is rather based on the reasonableness of the advisor’s recommendation in light of the factors listed above. In the Matter of the Arb. Between: Michael F. Zinn As Co-Tr. & Beneficiary of the Zinn Fam. Charitable Tr., (Claimant ), No. 02-00366, 2003 WL 21262095, at *6 (May 21, 2003). Suitability is judged at the time the investments were made. In the Matter of the Arb. Between: Claimant, Robert Anthony Daly , No. 19-02983, 2020 WL 4217489, at *4 (July 27, 2020). However, investors and investment advisors should continue to mind investments relative to changes to the factors considered for suitability.

Importantly, the suitability requirement does not apply to investments executed based on investor’s directions, although this exception mainly applies to sophisticated investors. Sheldon Co. Profit Sharing Plan and Trust v. Smith , 828 F. Supp. 1262, Fed. Sec. L. Rep. (CCH) ¶ 98081 (W.D. Mich. 1993). The SEC defines a sophisticated investor as one who has “sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.” Securities and Exchange Commission Rule 506 of Regulation D. The suitability requirement does apply, as well, to fees associated with mutual funds. Benzon v. Morgan Stanley Distributors, Inc. , 420 F.3d 598, Fed. Sec. L. Rep. (CCH) ¶ 93,332, 2005 FED App. 0362P (6th Cir. 2005).

In addition to choosing the correct mutual fund, investors should mind the fee schedule. Fund managers are charged with a great feat of managing a complex investment scheme commonly encompassing hundreds of individual companies and reaching hundreds of millions of dollars under management. Fund managers demand large fees. However, the Supreme Court established that their fees must bear a reasonable relationship with the services rendered. Jones v. Associates L.P. , 559 U.S. 335 (2010). The Investment Company Act of 1940, 15 U.S.C.A § 80a-35(b), allows mutual fund investors to file civil litigation against fund managers for breaches of duty of their fiduciary obligation on grounds of unreasonably high compensation. Fee schedules are found in the fund’s prospectus labelled as Shareholder Fees and Operating Expenses. Investors should compare fees with other funds of similar size and profiles both before choosing the winner and confirming that their present fund is paying reasonable fees compared to competitors.

Mutual fund investors seeking remedies against their investor advisors for alleged violations of their suitability duties or unreasonable fees, or for any dispute arising from the agreement, will likely require arbitration. Agreements between investors and their advisors typically require arbitration to resolve disputes. FINRA and the SEC regulate broker-dealers and registered representatives who sell mutual funds, not mutual funds directly. Nor does the FDIC or any other government agency directly regulate mutual funds. Regulations imposed on broker-dealers and investment advisors include advertising, sales practices including commission, incentives, and execution among others. Fortunately for investors, arbitration is typically more expeditious and cost-effective than traditional civil adjudication in the courtroom.

Client Reviews
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Working with Joe was an absolute pleasure considering the unfortunate situation I was dealing with! He’s very knowledgeable and easy to communicate with. He kept me informed in all aspects of my case in a timely manner. Whenever I contacted him with a question he responded quickly. His expertise came through for me! I would highly recommend him! Joanne
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I hired Joe and his firm Stoltmann Law office to represent me in a case where my investment guy had lost a substantial amount of money in my account. He invested in some very speculative energy stocks which should not have been in my portfolio due to my request for a very conservative investment portfolio. I was very impressed and satisfied with the representation and negotiations on my behalf by Joe and Stoltmann Law offices and I would definitely recommend them to anyone who would be in need of a very fine firm. Anonymous
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Never having a need to file suit against anyone, let alone a major multi-national brokerage firm, I was at a loss to find a legal firm to assist me. After much searching, I found Stoltmann Law Offices, PC. They were very diligent and professional in the handling of my case and I am glad that I retained their services. I would definitely refer them to anyone seeking similar help. Donald F.