Advertiser Disclosure

Investing

How Mutual Funds Work

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Nearly half of all American households own at least one mutual fund, according to 2017 estimates by Investment Company Institute, and mutual funds represent 67% of 401(k) plan assets. If you participate in an employer-sponsored retirement plan, you may be investing in mutual funds with each paycheck. But for something so ubiquitous, they are not well understood. Learn more about exactly how mutual funds work before you make your next investment.

What is a mutual fund?

A mutual fund is a pool allowing many investors to own portions of a larger investment portfolio of stocks, bonds and other types of securities. Most are known as open-end investment companies or open-end funds because investors are continuously buying or selling shares. (The two other types of investment companies — closed-end funds and unit investment trusts — only sell a limited or specified amount of shares, similar to an initial public offering.) Mutual fund shares are redeemable, meaning you can sell at any time and the fund buys them back from you.

The Securities and Exchange Commission regulates mutual funds and the managers selecting fund investments. All mutual funds start with a stated objective and investment strategy (included in the fund’s prospectus), a detailed offering document you can get through the fund company, broker or SEC.gov.

By investing in mutual funds, you’re easily exposed to a variety of markets, sectors and investment asset classes, but some funds can be riskier than others.

How to buy mutual funds

You can buy shares of mutual funds directly from the fund company, through a broker or through your employer-sponsored retirement account.

A mutual fund share is a portion of ownership in the fund and a percentage of its growth. What you pay for each share is called the net asset value (NAV), or the fund’s value per share minus its liabilities. The NAV is calculated once per day at the close of the market after investors have purchased shares, so you may not know the exact NAV you paid until after purchase.

The cost you pay to be a mutual fund investor is known as its expense ratio, which is charged on an ongoing basis as a percentage of invested assets. Some funds may also charge added fees when you purchase shares (“front-end loads”) or when you sell them (“back-end loads”). There may also be distribution fees, minimum balance fees, short-term trading fees and so on.

Fees and expenses decrease your investment return, so it’s important to understand what you will be charged for before you invest. If high fees are a concern, there are plenty of “no-load” and low expense ratio fund options to choose from.

Types of mutual funds

Stock mutual funds invest in a variety of stocks or equities, representing ownership shares in corporations. Stock funds may invest according to a growth or value strategy, or within a particular sector or region. Stocks have consistently produced the highest rate of return over time, but because values can rise and fall quickly, they can be riskier than other asset classes.

Bond mutual funds hold fixed-income investments representing government, municipal or corporate debt. Bonds may be considered less risky, but different investing strategies carry various types and levels of risk.

Money market funds invest in high quality, short-term government or corporate bonds that are considered low risk. The goal of the investment is stability, so money market funds offer minimal returns.

Hybrid funds or balanced funds invest in some combination of stocks, bonds and money market securities to balance the risk of the overall fund with potential growth.

Actively managed vs. passively managed funds

The majority of mutual funds have a professional manager or management team selecting investments with a goal to outperform a given benchmark. These managers are paid by the fund, which can impact the expense ratio and dampen the fund’s performance. This is one reason the majority of active mutual fund managers underperform their index benchmarks.

Passively managed funds like index funds aim to match the benchmark rather than beat it. These funds track market indices such as the Standard & Poor’s 500 or Russell 3000. Because a computer model effectively runs them, index funds have lower overhead and are generally lower cost.

Similarly, exchange-traded funds (ETFs) are a lot like mutual funds concerning SEO regulation and investment options — most are indexed, some are actively managed. The key differences are in how you buy them. Shares of ETFs trade on an exchange, and are bought and sold throughout the day just like stocks. Investors pay market value, which may be different from the NAV calculated at the end of the day. You will also pay a brokerage fee to trade ETF shares.

How you earn money with mutual funds

Investors can earn money from mutual funds in three basic ways:

  • Income distributions. When the underlying investments pay dividends or interest, mutual fund investors participate in these gains. Mutual funds pay annual distributions, which can be reinvested into the fund if you choose.
  • Capital gains distributions. Investments are bought and sold often within mutual funds. If sold at a gain, investors realize a capital gain that’s paid as an annual distribution or reinvested into the fund.
  • NAV increases. As the underlying investments gain value, the mutual fund’s share value increases. If you sell shares of your mutual fund for more than you paid for them, you realize a capital gain.

If investors hold mutual funds within tax-favored accounts like an IRA or 401k, they do not have to report gains or losses on an annual tax return until they sell the fund. Invest through a taxable account, and you will need to report mutual fund dividends with yearly income taxes, along with short-term (for investments held less than one year) and long-term capital gains or losses, depending on your tax bracket.

How mutual funds work: Reasons to invest

  • Ease of use. The average investor can own nearly anything through a mutual fund, through shares that can be redeemed at any time and at a fair price.
  • Affordability. Many funds require investment minimums of at least $2,500, but some will waive them if you agree to regular monthly contributions. In 2018, Fidelity began offering index funds with no minimum balance.
  • Diversification. It’s an essential investing concept: Spread your risk by owning a broad base of investments instead of just one. With a single mutual fund purchase, you can gain exposure to a diversified asset class or even a balanced portfolio to suit your goals and risk tolerance.
  • Professional management. If you like the idea of someone selecting and monitoring investments for you, mutual funds offer direct access to professional asset management. With this perk comes a loss of control, and as an investor, you may not have much transparency into fund holdings. Investigate the long-term track record of the fund manager, including years of experience, performance and any deviations from strategy.

Know exactly what you’re buying and mutual funds can be a great investment to help you reach long-term goals. Look for funds that are consistent long-term performers, rather than the year’s hottest picks. And pay attention to fees; all else being equal, a fund with high fees must outperform one with low fees to produce the same return. Favoring low-cost funds is a sure way to boost your profit.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Phipps
Melissa Phipps |

Melissa Phipps is a writer at MagnifyMoney. You can email Melissa here

Advertiser Disclosure

Investing

Fidelity Cash Management Account Review 2020

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Fidelity’s cash management account gives its customers a convenient place to keep cash balances with the firm, rather than moving them back and forth between external bank accounts. Like some of the other cash management products offered by brokerages, it’s not necessarily a perfect replacement for your conventional checking account. However, customers can benefit from Fidelity’s generous unlimited ATM fee reimbursement program, even if the APY isn’t the highest available.

Fidelity Cash Management Account Pros

Fidelity Cash Management Account Cons

  • Unlimited ATM fee reimbursements
  • No monthly fees
  • No minimum balance requirement
  • FDIC insurance up to the legal limit
  • Uncompetitive APY
  • Few branch office locations

This review will take a closer look at how Fidelity’s Cash Management Account stacks up in comparison to offerings from traditional banks and other fintech competitors, to help you determine if it’s a good fit for your savings needs.

Fidelity Cash Management Account features

Fidelity markets its cash management account is marketed as a convenient way to enjoy checking-account-like features with FDIC insurance, without corresponding bank fees.

While the account is designed as a home for your idle cash when its not invested in other Fidelity products, the firm has gone the extra mile by adding ease of use and a generous ATM fee reimbursement program, which no doubt helps encourage many investors to keep their extra cash with Fidelity.

You can deposit funds to your Fidelity Cash Management Account in a number of ways. The fastest option is to transfer money from one of your existing Fidelity accounts. If you have a paper check, you can use the Fidelity app to make a remote deposit, just as you could with many online savings accounts. The account accepts direct deposits, and you can also make a one-time transfer at any time from your linked external bank account, or mail a check to Fidelity directly.

Since Fidelity is a brokerage firm, not a bank, it holds its customers’ funds at accounts with partner banks, which also provide FDIC insurance. Fidelity automatically transfers your deposits to these partner banks in increments not exceeding $245,000 to ensure that your deposit at each bank doesn’t exceed the $250,000 FDIC insurance per account. The partner banks offer a combined $1.25 million in FDIC insurance.

Fidelity Cash Management Account vs. online savings accounts

Here’s how Fidelity’s Cash Management Account compares to some of the highest-earning online savings accounts from our best online savings accounts review:

Financial Institution

APY

Minimum balance to earn APY

Fidelity

0.82%

$0.01

Vio Bank

1.95%

$100

Customers Bank

1.95%

$25,000

Barclays Bank

1.70%

$0.01

Goldman Sachs Bank USA

1.70%

$0.01

Ally Bank

1.60%

$0.01

In terms of APY, Fidelity’s cash management account doesn’t stack up to the best online savings banks. Vio Bank and Customers Bank both offer APYs in the neighborhood of 2%, far above Fidelity’s 0.82%.

That said, Fidelity’s generous unlimited ATM fee reimbursement program is better than most of its online savings competitors. Marcus by Goldman Sachs®, for example, doesn’t even offer ATM access at all, let alone have any fee reimbursement policy.

Fidelity Cash Management Account vs. robo-advisor cash management accounts

Many robo-advisor firms have also launched their own cash management accounts to help them compete with both conventional brokerages and online banks. The features and benefits can vary widely from firm to firm, but overall they tend to provide a combination of checking and savings account functionality. This includes high APYs, free ATM access, remote check deposit and FDIC insurance via partner banks.

Account name

APY

Fidelity Cash Management Account

0.82%

Wealthfront Cash Account

1.78%

Betterment Everyday Cash Reserve

1.83%

SoFi Money

1.60%

Fidelity Cash Management Account vs. Wealthfront Cash Account

The comparison of cash management accounts from Fidelity and Wealthfront comes down to ease of access versus a high interest rate. Fidelity offers a debit card and unlimited ATM fee rebates, making for a highly accessible account. Wealthfront doesn’t offer any ATM access, period. However, the Wealthfront Cash Account’s current APY is much higher than Fidelity’s APY. (Wealthfront has claimed that it does intend to offer ATM access at some future date.)

Beyond these important distinctions, Fidelity and Wealthfront share similar features. For both firms, balances in are held in accounts at multiple partner banks, which provide FDIC insurance — Fidelity’s partner banks provide a total of up to $1.25 million in FDIC coverage, while Wealthfront’s partner banks provide up to $1 million in FDIC insurance. Neither firm charges monthly fees, and both offer unlimited withdrawal and deposits.

However, Fidelity offers mobile check deposit and direct deposit funding options, while Wealthfront still only accepts deposits via ACH bank transfer, wire transfer or account transfer.

Fidelity Cash Management Account vs. Betterment Everyday Cash Reserve

The Betterment Everyday Cash Reserve pays 1.83% APY and allows unlimited withdrawals and deposits. Betterment holds your cash at accounts with multiple partner banks, which provide up to $1 million in FDIC coverage.

Unlike the Fidelity Cash Management Account, withdrawals from the Everyday Cash Reserve account are via ACH bank transfer only. Both deposits and withdrawals are generally completed within one or two business days, depending on when in the day they are set.

Betterment has been promising to launch checking features that would expand the utility of its cash management account with ATM access and related features, however it remains unclear when this component will arrive. Until that time, the Fidelity Cash Management Account remains a much more liquid option.

Fidelity Cash Management Account vs. SoFi Money

SoFi offers a full-fledged line of savings, lending and investment products. SoFi Money offers features of both checking and savings accounts in one high-yielding account, including paper checks, bill pay and ATM access.

Like the Fidelity Cash Management Account, SoFi Money offers unlimited ATM fee rebates. It’s competitive APY isn’t the best available from competing robo-advisors or online savings accounts, but it’s still higher than the APY offered by Fidelity.

Similar to Fidelity, Wealthfront and other cash management accounts, SoFi Money holds its customer’s deposits with partner banks, in multiple FDIC-insured accounts. SoFi’s six partner banks offer customers up to $1.5 million in FDIC insurance. SoFi Money charges no monthly or transaction fees.

Who should get a Fidelity Cash Management Account?

The target market for the Fidelity Cash Management Account is existing Fidelity customers. The convenience of having your money swept into FDIC-insured bank accounts, with easy access to your investment account has real value. So does the ATM access, which isn’t always found with cash management accounts from competing brokers.

However, Fidelity’s ATM reimbursement policy makes the account of added interest to anyone looking for a place to store cash in a readily accessible, interest-bearing account seeking to avoid ATM fees.

An important thing to note is that although Fidelity’s Cash Management Account APY is much higher than that paid by large, traditional banks, it pales in comparison to those paid by other cash management accounts and online savings accounts.

The bottom line is that the Fidelity Cash Management Account can be a good option for existing Fidelity customers, and it’s a definite step up from the rates paid by traditional banks. However, those seeking the highest APYs may prefer alternatives.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

John Csiszar
John Csiszar |

John Csiszar is a writer at MagnifyMoney. You can email John here

Advertiser Disclosure

Investing

Review of Evercore Wealth Management

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Evercore Wealth Management is a registered investment advisor (RIA) that specializes in investment advisory services for high net worth individuals, families and legal entities, such as trusts. The firm, which has 50 investment advisors on staff, typically only works with clients who have at least $5 million in investable assets. It currently has a little over $7.5 billion in assets under management (AUM). The firm’s headquarters is in New York City, but it also has locations in Minneapolis, San Francisco and both Palm Beach and Tampa, Fla.

All information included in this profile is accurate as of January 15th, 2020. For more information, please consult Evercore Wealth Management’s website.

Assets under management: $7,559,815,731
Minimum investment: $5 million
Fee structure: A percentage of AUM, ranging from 0.25% to 1.00%, depending on account size and investments
Headquarters: 55 East 52nd Street
23rd Floor
New York, NY 10055
https://www.evercorewealthandtrust.com/
(212) 822-7620

Overview of Evercore Wealth Management

Evercore Wealth Management launched in September 2008. The firm is a subsidiary of Evercore, a global investment bank also based out of New York. Evercore founded Roger Altman in 1995; prior to the company’s founding, Altman was the co-head of investment banking for Lehman Brothers and served two years as deputy secretary of the U.S. Treasury in the Clinton administration.

Evercore owns 62.5% of Evercore Wealth Management. The remainder of the firm is owned by the partners of Evercore Wealth Management.

Evercore Wealth Management currently has over $7.5 billion in assets under management. The firm has 84 employees, of which 50 perform investment advisory services. Aside from investment advice, some of these advisors also provide trust fund services for their clients.

What types of clients does Evercore Wealth Management serve?

Evercore Wealth Management mostly works with high net worth individuals and families. Investors typically must have at least $5 million in investable assets in order to open an account with the firm. While Evercore Wealth Management’s SEC documents show that the firm does have a few non high net worth clients, the vast majority of its AUM comes from high net worth individuals. The SEC defines high net worth individuals as those with at least $750,000 in assets under management or a net worth believed to be at least $1.5 million.

Besides individuals, Evercore Wealth Management also serves entities that can meet their investment minimums, including trusts, estates, endowments, pension and profit-sharing plans, foundations, charitable organizations and insurance companies.

Services offered by Evercore Wealth Management

Evercore Wealth Management focuses on providing investment advisory services to its high net worth clients. The firm offers investment management on both a discretionary basis (meaning they can execute trades on behalf of a client) and on a non-discretionary basis (meaning the client makes all trading decisions). However, the firm has a much larger number of discretionary investment accounts than non-discretionary accounts.

In addition to portfolio management, Evercore Wealth Management also provides financial planning, both as a standalone service or as part of an investment advisory service.

The firm also has an affiliate service, Evercore Trust, that manages trust fund services for the firm’s high net worth clients. If a client needs something beyond what Evercore Wealth Management can provide, the firm offers an outside advisor selection service. Finally, Evercore Wealth Management holds investment training seminars and publishes advice through its quarterly journal, Independent Thinking.

Evercore’s services include:

  • Investment advisory services/portfolio management (mainly discretionary, but some non-discretionary)
  • Financial planning
    • Retirement planning
    • Trust and estate planning
    • Charitable planning
    • Education planning
    • Tax planning and management
    • Insurance planning
    • Cash flow forecasting
    • Spending analysis and budgeting
    • Long-term care planning
    • Debt management
    • Divorce planning
  • Collaboration with clients’ lawyers, accountants, etc.
  • Workshops and seminars
  • Newsletters and publications

How Evercore Wealth Management invests your money

Evercore Wealth Management doesn’t offer standardized funds for all of its clients; instead, the firm creates customized portfolios for each client. When someone first signs on, Evercore Wealth Management advisors get to know their goals, priorities and constraints.

With this information, the advisors will recommend a portfolio of bonds, equities and mutual funds as well as third-party exchange traded funds, alternative assets and cash. Clients have the option to weigh in on their strategy: for example, they can declare that they do not want certain assets in their portfolio. From time to time, Evercore Wealth Management may also recommend investments from outside third parties.

Evercore Wealth Management uses a broad investment strategy and can consider domestic, foreign and global assets, as well as small, mid-size and large-cap stocks. Through this approach, Evercore Wealth Management believes it can achieve the highest after-tax and after-fee returns for its clients while also meeting their unique financial goals.

Fees Evercore Wealth Management charges for its services

Evercore Wealth Management charges a fee based on a percentage of assets under management for its investment advisory services. The firm typically charges a flat 1.00% annual fee for portfolios of up to $10 million. For portfolios over $10 million or those with at least $5 million in fixed income investments, the annual rate can range from 0.25% to 1.00%, depending on the investments and portfolio size (see the chart below for specifics).

The Evercore Wealth Management brochure notes that clients can negotiate their annual rate before signing up, so the actual amount may be higher or lower than the rates listed in the firm’s fee schedule. In addition to an asset-based fee, clients may also need to cover the related costs of their investment strategy, such as brokerage fees, commissions, custody fees, tax preparation fees and investment management fees from third-party mutual funds.

If a client wants standalone financial planning, Evercore Wealth Management charges a fixed fee that the firm negotiates on a case-by-case basis.

Finally, Evercore Wealth Management can make money from intercompany arrangements for referring clients to other parts of Evercore, like when the firm refer a client to the company’s trust division.

Portfolios Annual asset-based fee rate
Accounts up to $10 million 1.00%
Accounts over $10 million, or those with at least $5 million in fixed income Fixed income:

  • 0.35% on the first $10 million in fixed income
  • 0.25% on the remaining fixed income balance

Growth assets:

  • 1.00% on the first $10 million in growth assets
  • 0.75% on the next $10 million
  • 0.60% on the remaining growth assets balance

Evercore Wealth Management’s highlights

  • Multiple awards for size and performance: Based on 2018 end-of-year assets under management, Evercore Wealth Management ranked No. 30 on Financial Advisor’s list of the leading RIAs. The firm is also on the short list to win multiple awards in 2020 from Family Wealth Report, in categories recognizing its private client investment platform, thought leadership and multi-family office, among others.
  • Custom, personalized portfolios and financial plans: Evercore Wealth Management does not offer standalone funds or model portfolios. Instead, the firm customizes investment recommendations for each of its clients based on their unique goals.
  • Extensive range of services: In addition to portfolio management and investment advice, Evercore Wealth Management offers comprehensive financial planning and trust services. The firm also holds training workshops and publishes a quarterly journal, which recently featured articles on subjects including wealth planning and how to sell a business.
  • Personalized advisor attention: When a new client signs up to work with Evercore, they are matched up with at least two financial professionals to look after their account: a wealth advisor and a portfolio advisor.

Evercore Wealth Management’s downsides

  • Extremely high investment minimums: You can only open an account with Evercore Wealth Management if you have at least $5 million in investable assets. The firm’s high minimum largely puts it out of reach for all but investors who have a high net worth.
  • Focused on costly, active investment strategies: Since Evercore Wealth Management designs custom portfolios with more hands-on discretionary advice, the firm’s fees are quite high. Evercore charges a flat 1.00% AUM fee on equity accounts up to $10 million. —that’s double the median 0.50% investment management fee typically charged on accounts over $5 million, according to financial planning site Kitces.
  • Fees not reduced except for massive accounts: While Evercore Wealth Management does reduce fees for larger accounts, the firm only starts giving a discount for accounts with over $10 million in assets or those that put at least $5 million in fixed income. You’ll need over $20 million to qualify for the firm’s lowest 0.60% rate on growth assets, which is still not that low in comparison to industry average fees.
  • Potential conflict of interest with intercompany services: Evercore Wealth Management makes money from intercompany arrangements, such as a recommendation of services from other parts of the company, like the trust division. This could create a conflict of interest where advisors recommend a service that is not necessarily the best fit for the client due to financial incentives.

Evercore Wealth Management disciplinary disclosures

Over the past 10 years, Evercore Wealth Management has not been involved in any legal or disciplinary actions. Financial advisory firms that are registered with the SEC must report any such disciplinary actions in their Form ADV (SEC-filed paperwork). Disciplinary disclosures may include instances of criminal behavior, regulatory infractions and civil suits against an RIA.

Evercore Wealth Management onboarding process

For its onboarding process, Evercore Wealth Management starts by reminding investors they only work with clients who have $5 million or more in investable assets. If you can meet the investment threshold, the firm suggests you contact the regional investment office closest to you. Offices are located in New York; Minneapolis; San Francisco; Palm Beach, Fla; and Tampa; Fla. You can also email the firm’s CEO directly for information.

The firm then will match you up with several members of its advisory team to discuss your personal investment and financial goals and to explore how Evercore Wealth Management could be a good fit for you. If you are happy with the discussion, you then sign the firm’s investment management agreement to launch your account and transfer over your assets.

From there, your advisors will put together your personalized investment plan, based on your goals and strategies. Evercore Wealth Management notes that each of its clients work with at least two financial professionals, a wealth advisor and a portfolio manager, so you will have lots of personal attention for your account.

Is Evercore Wealth Management right for you?

If you’re an extremely high net worth individual and want an RIA that goes above and beyond for your specialized needs, Evercore Wealth Management could be worth a look. The firm customizes clients’ portfolios to their unique situations, and each client has at least two financial professionals managing their account. However, for this level of service, you must be able to meet the firm’s steep minimum of $5 million in investable assets.

Additionally, this high-end service comes at a price. Evercore Wealth Management charges a relatively costly fixed asset-based fee, even for accounts over $20 million. If you don’t think you need as sophisticated an investment strategy, you could find other advisors charging significantly less. With a firm like Evercore Wealth Management, though, you get what you pay for.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

David Rodeck
David Rodeck |

David Rodeck is a writer at MagnifyMoney. You can email David here