Still, I stand by my assessment.

Back when I worked for Edward Jones, American Funds made up the majority of what I recommended for my clients. So I, too, would consider myself “extremely familiar with American Funds.”

My statement that their funds tend to carry expense ratios of “almost 1%” comes from a simple check on their website. If you don’t call that “almost 1%”, fair enough.

From where I’m standing, any cost for active management is too high a cost. (You’re welcome to disagree of course — many people do.) So the only circumstance in which I’d recommend American Funds is when they actually cost less than the alternative.

Also, I’m genuinely curious as to your statement that, “You can effectively practice asset allocation with American’s funds, if you understand how these funds are managed and then use them accordingly.” If you want to elaborate, that’d be super.

I have read your blog for several months now, and I enjoy it very much. IMO, you often take a complex subject and simplify it in a way that makes the subject matter easier to understand, especially for folks who don’t work with investments, taxes and/or financial planning on a daily basis or as a way of making their living. In doing so you tend to avoid the trap many financial writers (pundits?) frequently fall into, which is making blanket statements without providing (accurate) supporting facts, or over generalizing on a given topic while providing little, if any, proof for the statements being made and/or the conclusions being drawn. That sets you apart from many of your writing peers.

However, in the case of this post on American Funds, I think you have fallen short of your normal high standard of excellence. I was especially troubled by these statements:

If somebody is currently attempting to sell you an American Funds portfolio for your IRA or taxable account, I’d suggest politely declining. I’d also suggest finding another advisor — one not paid on commission.
American Funds aren’t the worst thing you could put your money into, but the reality is that there are better, less expensive options available. There’s really no need to pay a sales load or an expense ratio of almost 1% per year.

These comments give readers the impression that American Funds are available only with a sales load, when in reality American offers two share classes [F-1 and F-2] that are frequently used by fee based and fee-only advisors. Also, some of their “R” Class shares have very low annual expense ratios when used in employer retirement plans.

Also, I’m not sure where you came up with the figure for ‘typical’ American Funds expense ratios of “almost 1% per year.” In just about all cases, the ER’s for American’s mutual funds are a good bit less than 1% per year on F-1 and F-2 shares (fee based/fee-only), and are even a bit less than that for their “A” Class shares (which do carry a front-end sales charge, aka “load”). For investors with an extended time horizon, these “A” shares are cost competitive with accounts managed by fee based and fee-only advisors.

I have been investing for some 30+ years, and own a number of mutual funds in several taxable and tax deferred (retirement) accounts. I use both index funds and some actively managed funds, from multiple mutual fund families/companies, including but not limited to, Fidelity, Vanguard, T Rowe Price, Davis, Dreyfus, Janus, and American Funds. I pay close attention to ER’s and all other fees, charges and expenses, as any well informed investor should.

50% of my son’s college fund consisted of investments in three different American Funds accumulated over an 18 year period. As a long term American Funds’ shareholder, I can unequivocally state, with no hesitation and complete conviction, that my family’s interests have been very well served by this mutual fund organization over many years.

I am extremely familiar with American’s mutual funds, and based on that knowledge I can tell you there are many benefits to investing with American Funds. However, as with any mutual fund investment, you have to know what you own, why you own it, how it works, and what it costs. Also, I respectfully disagree with some of Tony’s comments. You can effectively practice asset allocation with American’s funds, if you understand how these funds are managed and then use them accordingly.

In summary, I’m one of your biggest fans. However, IMHO, this post is not one of your better efforts. It’s poorly worded, far too simplistic and quite one sided. It paints a distorted and unfair picture of a first rate, shareholder friendly organization which has historically been a rather good steward of its investors’ funds. Many of the points you make would be/are well taken regarding other mutual fund families often sold by brokers and advisors. However, in many instances, these criticisms ring hollow with American’s mutual funds. At least that’s how I see things from my vantage point, having owned eight to ten of their funds in a variety of accounts over the years.

Sorry to disagree with you on this one. Please keep up your usually outstanding writing!

I’ve seen the flip side of this issue (from the advisor’s standpoint) and agree that they’re simply not the best option for investors but there are much worse things you could be in. Another reason I don’t like them is their active management approach and the difficulty they create in sticking to an asset allocation (as Anthony pointed out).

Thanks for explaining this so well and clearly. I hope people will listen and examine their portfolios!

1) with 6 different share classes of a fund (R1 – R6), the salesperson can often pick their own compensation. Smaller plans often pay the highest expense ratio. Ie. Growth Fund of America (RGACX – r3) can range from .37% to .99%.
2) The American funds make it almost impossible to stick to an asset allocation plan. Each fund is allowed to invest across many markets both domestic and international.
3) the funds have the ability to hold large cash positions anytime they choose – again messing up a good asset allocation strategy.
4) The funds cannot be easily benchmarked, making it difficult to properly measure and monitor.
5) advisors who sell these funds in 401k plans are NOT held to a fiduciary standard and cannot give unbiased advice, which employees need and crave.

Great post!

Regards, Tony