ask the experts
GREAT QUESTIONS, ANSWERED

Retirement Money

Q. Our retirement plan is tied to mutual funds, which are managed by so-called experts. Lately, though, I’ve gotten fed up with the big fees and trading costs that are often hidden in the fine print. I’m looking for alternatives. Any suggestions?

A. Perhaps you should consider index funds. “These are baskets of stocks or bonds that mirror the performance of specific stock indexes such as the S&P 500 or the Nasdaq Composite,” says Richard A. Ferri, author of All About Index Funds (McGraw-Hill Trade, 2002) and president of Portfolio Solutions of Troy, Mich.

Since index funds don’t employ high-priced managers to pick stocks, their fees are significantly lower than those of equity mutual funds, Ferri says. “That’s the big advantage with these investments.” With stock funds, fees typically run from 1.5 percent to 1.6 percent. In addition, investors pay trading or brokerage fees.

In contrast, passively managed index funds charge approximately .25 percent, and there are few trading fees. “On a $100,000 investment, that’s a difference of paying $1,600 for a stock fund or $250 for an index fund,” says Ferri. “That money saved goes into the investor’s pocket.”
When the market does well, index funds perform accordingly and often outpace many managed funds. Business owners can buy index funds from investment firms such as Dimensional Fund Advisors, Vanguard and Barclays.

Before you make any moves, be sure to consult with a qualified investment advisor.

Buying Your Competition

Q. I’m not sure what’s involved in due-diligence and what level of detail I should go into. Can you provide some guidance?

A. Anita Campbell, president and CEO of Anita Campbell Associates, a Medina, Ohio–based consulting firm, says to bring in someone who has been through the due-diligence process. “This can be a business broker, an attorney or a consultant,” she says. Next, you obtain a due-diligence checklist detailing all the items you need to examine before the deal goes through. Campbell says you can find these on the Internet. “Just go to Google and look for due-diligence checklists,” she says. “You’ll even find lists that reflect specific types of business.”

Look closely at the physical plant—offices, buildings, furniture and inventory—and make sure you use a skilled financial person for the books. “I worked on a due-diligence project last year with a financial expert who quickly pointed out that the numbers were inflated—depreciation hadn’t been factored in yet,” Campbell says. It helps to talk with both the seller and the employees, but Campbell suggests staying clear of customers. “If they find out the business is being sold, they may feel they’re being abandoned and go somewhere else,” she warns. “It’s critical, though, to examine customer records and make sure existing customer contracts are binding.”