Bank of America (NYSE: BAC) is paying $6 million in fines to settle SEC charges that the company favored the recommendation of its own mutual funds while purporting to be offering unbiased advice. From the SEC's release on the matter, "The recommendations were supposed to be based upon an objective and unbiased research methodology that was outlined for clients and prospective clients in promotional literature and disclosures. However, in certain instances, Banc of America Investment Services and Banc of America Capital Management focused on subjective criteria in the research process, which favored Nations Funds, and resulted in increased assets under management for Banc of America Capital Management."

15,000 customer accounts were effected, and the settlement will be used to compensate those customers: an average of $400 each. The average "losses" to consumers were quite small, but there's an important principle here for investors to keep in mind: be wary of any advisor who suggests that you buy their products.

If you choose to work with a financial planner/advisor/manager, make sure it's a fee-only one, not someone paid on commission.

Better still, put together your own portfolio of low-cost index mutual funds. For a couple great examples, check out Ben Stein's model portfolios.

Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.

Mutual funds are great ways to invest. They offer professional management and risk diversification, especially if it's a general fund such as large cap growth and income. The diversification is less if it's specialized such as healthcare, but there is still lower risk because the fund buys many different stocks in a sector. Many investors believe they're at a higher level than fund investing, one where they pick individual stocks and make better returns than mutual funds. That may be true, but most likely not for every investment.

By that I mean there is no way you can invest in China with a diverse group of stocks and know much about each company. And even if you can get information on a company, it's usually at least six months old. Imagine how much changes anywhere in six months, much less in a volatile economy like China. The initial reaction might be that things are even better now. But not necessarily for your company. Or when things do change, as every economic cycle does, you may be the last to know that the bubble burst six months ago for the sector in which your company operates.

Over the last quarter $100 billion has left equity funds. The FT says that data from Emerging Portfolio Fund Research shows that "investors pulled $70bn from US, Japan and Western Europe funds during the quarter." Some of that money went into funds which invest in emerging markets and a great deal of it went into safe money market funds.

The data means that many mutual fund companies will post bad first quarter figures, but the news is much more serious than that. Such a large amount leaving these funds means that stocks are being sold to provide the capital for redemptions. The process sets up a bad cycle. Stocks are sold to provide money to go into other assets. The sale of stocks continues to push equity indexes down. This leads to more withdrawals.

The only positive aspect to the news is that there is now hundreds of billions of dollars in money market funds, most of it very liquid. If the markets do begin to recover due to better news on earnings or a perceived end to problems in the financial sector, there is a great deal of "dry powder" to be put back in the market. That could further accelerate a market recovery.

But, if withdrawals from equity funds continues, that could be a long way off.

Douglas A. McIntyre is an editor at 247wallst.com.

If you're like most people, you probably have a larger percentage of your investment money in cash than you had two years ago. While some investors are taking their chances in this recent market volatility, many are choosing to wait on the sidelines until the "All Clear!" call comes in (whenever and however that's really communicated -- but that's another blog post).

Well, these investors sitting on cash are not alone. Bloomberg reports this morning that mutual funds have been desperately selling stocks and moving to pretty sizable cash hordes. In a survey conducted by Merrill Lynch and reported by Bloomberg, managers have been feverishly adding to their cash positions and consequently, "cash relative to total assets also rose to a five-year high as managers found fewer stocks to purchase and anticipated redemptions."

This brings up a couple of issues. Let's be clear: mutual fund managers want to manage volatility like all investors. The problem here is that if I hand my money over to a small cap manager because I believe he's pretty proficient in picking stocks, I don't really want him moving into cash. That's my job as portfolio manager of my own investment account. I'm essentially paying him to be in the market -- not move out of it.

Whenever Wall Street starts packaging a product for the masses that's used by sophisticated investors, you know that there is big trouble ahead. There is no way that an individual investor will be able to value and understand the drivers of that investment's value. And it's fairly certain that Wall Street is packaging the security to enrich itself with fees. Wall Street doesn't have to concern itself with whether its investors make money.

This is the first thing that came to mind when I read a Bloomberg News story Barclays Plc (NYSE: BCS) introduced a new product that put a scare into Vanguard Group Inc. and the rest of the $13 trillion U.S. mutual-fund industry. The product? An exchange-traded note (ETN). I really don't know what it is but the story says that it allows individual investors to buy a type of forward contract linked to commodities and assets ranging from oil to currencies to foreign stock indexes. It has lower fees than mutual funds, is less regulated and, for now, lets holders defer taxable income indefinitely.

It sure sounds great and that's probably why the mutual fund industry is so afraid of it. But before you go out and buy one of those ETNs, make sure you understand how its value is set and what makes that value go up and down everyday. Otherwise you could be in for a rude awakening. Can't figure out how to value an ETN? Then I suggest you hold onto your wallet with two tightly clasped fists. When Wall Street comes calling on Main Street for such complex securities.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

The Securities & Exchange Commission is looking for investor input on its new ideas for improving mutual fund disclosures.

According to the SEC, the purpose of the new proposals is to provide investors "with concise information about mutual funds that is easier to use than the mutual fund prospectuses available today." The proposal includes a requirement of a summary section in every prospectus that would include investment objectives, costs, principal investment strategies, risks and performance, top ten portfolio holdings, a list of investment advisers and portfolio managers, brief purchase, sale, and tax information, and information about broker compensation and conflicts.

A model prospectus summary on the SEC website is a great improvement over the current system which requires investors to leaf through mountains of boilerplate to find key information about their funds.

According to an article in the latest issue of SmartMoney (not available online), the industry is supportive of the measure as it will save it about $182 million in printing and mailing costs! But the industry is resistant to further suggestions that the new model for prospectuses should also include additional comparative data on fees and performance. It's a shame that the industry is opposed to giving investors more information; good funds would probably want to provide investors with this kind of data.

But the streamlined prospectus is a great improvement and hopefully it will come to fruition soon. Only about 10% of investors read prospectuses before investing in funds, and that number ought to be 100%.

There is no question that the recent explosion in ETF investing has changed the way we all invest. We all know the statistics, that it pays to buy and hold indices, be a passive investor and profit from "lazy portfolios." My hunch is that with the recent market bloodbath, we may see a move from ETFs back into actively managed accounts.

With most ETFs weighted toward their larger market-cap holdings, when a giant tumbles, look out below. Take the NASDAQ for example. Last year's gains in the index were almost all due to the staggering rise in Google (NASDAQ: GOOG), Research in Motion (NASDAQ: RIMM) and Apple (NASDAQ: AAPL). No stock moves in a straight line up forever. Investors in NASDAQ ETFs have gotten crushed so far in '08, as the high fliers are indeed coming back to earth.

With most ETF portfolios trading back at levels that we saw in the winter of '06, investors have made no money in the last 14 months. Actively managed accounts on the other hand have produced positive results. Like it or not, many investors are fair-weather friends and as soon as they realize that they could have made a lot more money investing in actively managed funds, they will move their money into these type of investments.

Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. Disclosure: Writer has no position long or short in any stock mentioned as of 1/18/08.

When it comes to mutual funds, there are the good, the bad and the ugly. Let's press past the obvious Eastwood-esque reference there and ask a question: how did your funds do this year? I'm not talking about returns -- I'm talking about returns minus sales costs minus transaction costs minus (insert misc. fee here) minus tax consequences of company stock turnover inside the fund.

You see, there is a lot more to "total returns" that most mutual fund hawkers like to advertise to lure in new investors. Total returns is a meaningless figure -- what counts is the return that your bottom line sees after everything is accounted for. So, then, what were the worst funds to own in 2007? That list probably spans a few thousand funds, but let's look at a short list here.

Clipper (CIMFX) -- through December 17th -- lost 2% year-to-date (YTD). Clipper has a huge 48% share of stocks in the financial market, which, as we all know, really has done pretty poorly in the back half of the year due to subprime write-offs and risky decisions that bombed and caused the ouster of many CEOs in this sector.

How about Oakmark Select (OAKLX)? Down 14% YTD on the back of including 15% of net assets in mortgage lender (and hurting) Washington Mutual. eggs in one basket? You bet. Those are just two funds with overconcentrations in industries that had exposure to huge risks -- and were hit hard -- this year. How are your funds doing?

An investor recently wrote to Kimberly Lankford over at Kiplinger's with a question about a topic that's rarely discussed: corporate governance at mutual funds.

The reader was reluctant to vote for directors at the fund because she knew nothing about them, and even inquired about serving on the board because "I probably know the average investor better than they do". Ms. Lankford explained that getting elected to a board is difficult for an outsider, and one industry insider said that he had never had someone ask to be on the board -- the appointments are handed out to friends and associates.

Lankford ended her response by saying that "As an investor, you can still influence your fund's business operations by attending shareholder meetings or voting for board members by proxy."

That may be true, but it's probably a waste of time. If you have concerns about your mutual fund's operations and/or governance structure, your best bet is to sell your shares. It isn't like activist investing in public companies, where corporate governance and managerial problems can depress a stock price creating an opportunity for an investor who has the cajones to shake things up. In mutual funds, your investment simply buys shares of the companies the fund owns. There's just no reason to take an activist stance, no value to be unlocked. There are plenty of well-run, ethical mutual fund companies out there to choose from. My personal favorite is Vanguard.

Only a few people really care, but there's a mutual fund battle raging: Are exchange-traded funds superior to traditional mutual funds, or should investors stick with the classics?

According (subscription required) to the Wall Street Journal, a lot of ETFs will be distributing large amounts of capital gains to investors this year -- and they'll have to pay taxes on them. The bull market of the past few years has left a lot of funds, traditional mutual funds as well as ETFs, with capital gains.

But ETFs remain for tax efficient than most traditional mutual funds, in part because most ETFs seek to mimic the performance of indexes, and trade very infrequently. Vanguard appears to be the leader in tax-efficient ETFs, and won't be making any capital gains distributions on any of its ETFs this year.

But there are other costs associated with ETFs that investors need to consider: Because they're traded on exchanges, you have to pay a commission each time you buy or sell shares of an ETF. If you're trading in small dollar amounts, those can eat up a significant chunk of your investment. In addition, the ease with which they can be traded can encourage hyper active trading which tends to lead to poor performance.

But for sheer tax efficiency, ETFs appear to be superior to traditional mutual funds.

Kiplinger created a hall of shame for mutual funds and you should definitely check it out to be sure you don't own one of these duds. You also want to be sure you don't buy any of them in the future. While some fund directors may get the hint and even find a good manager, the fact that they've got such poor records for so long means you couldn't even trust a turnaround attempt. The directors of these mutual fund groups are dropping the ball when it comes to oversight.

One pure disaster that Kiplinger highlights is the Franklin Real Estate Securities fund. This fund has been in the bottom 20% for one, three, five and ten years. To give you an idea of how out of touch with reality its board members are, the directors wrote in its annual report, "the Board found such performance to be acceptable." If that level of performance is acceptable to Franklin's board, I'd question their stewardship of all their funds.

If you follow growth and value investing gurus, you've probably heard of Legg Mason's Bill Miller. After 15 years of beating the S&P 500 index, the value investing champ is now in a two-year rut of trailing the index. What happened? All great things come to a change, so with another not-so-good trend under way, Mason is re-tooling some things to get back on track.

While I am a huge fan of growth investing and index funds, from international and emerging markets to REITs to small caps, I also pay attention to value funds and markets. With various industries and sectors, loading too much in one risks the potential for losing timing in another. Case in point: Miller's Legg Mason Value Trust (NASDAQ: LMVTX) was overweight in telecom and tech, and underweight in the energy sector in the last year or so, and that explains not beating the S&P 500.

How could such a seasoned manager miss the boat here? Like many of you, I've missed plenty of boats, and the man is only human. One of Miller's top 10 holdings is Amazon.com (NASDAQ: AMZN), which has seen a great rally this year, but still is overvalued once you consider the fundamentals of the company's financials.

How vulnerable is your mutual fund to the ongoing mortgage meltdown? In this series, BloggingStocks contributor Lita Epstein, author of more than 20 books including Trading for Dummies and The Complete Idiot's Guide to Improving Your Credit Score, digs into mutual funds' holdings looking for securities with exposure to the currently shaky credit markets.

Bank of America (NYSE: BAC) is playing a major role in the SIV bailout, even though it isn't a major player in the sale of SIVs. If you take a closer look at its retirement mutual fund portfolios, you can see one key reason why BAC wants to see the problem fixed. Bank of America offers a series of funds of funds for retirees. These funds of funds hold mutual fund shares in Columbia mutual funds. Columbia Total Return Bond Fund, according to its most recently posted portfolio - 3/31/07 - holds 41.8% of its portfolio in mortgage-backed securities, collateralized mortgage-backed securities and commercial mortgage-backed securities. In addition, it holds 13.9% in asset-backed securities.

I don't know how many of these securities may be tied to the current credit mess, but that's a huge bet on the types of securities now being questioned. An even bigger question is why would Bank of America put 34.39% of its holdings for its Bank of America Retirement 2005 fund in a mutual fund with such a significant exposure to the credit mess? A retirement fund with a target date of 2005 means that retirees are probably already depending on those funds and are already in retirement. That's when a person wants their funds to be at the lowest risk level.

Bank of America uses this Columbia Total Return Bond Fund for a major portion of its other holdings. Bank of America Retirement 2010 fund holds 32.63% in this Columbia fund, Bank of America Retirement 2015 holds 27.82%, Bank of America 2020 holds 22.83% and Bank of America 2025 holds 17.70%.

If you are a holder in Bank of America retirement funds you may want to look elsewhere. There are many well-balanced mutual funds out there that won't give you this type of risk exposure. The primary reason to invest using mutual funds is to get a well-diversified portfolio.

Lita Epstein is the author of more than 20 books including the "Pocket Idiot's Guide to Mutual Fund Investing."

How vulnerable is your mutual fund to the ongoing mortgage meltdown? In this series, BloggingStocks contributor Lita Epstein, author of more than 20 books including Trading for Dummies and The Complete Idiot's Guide to Improving Your Credit Score, digs into mutual funds' holdings looking for securities with exposure to the currently shaky credit markets.

JPMorgan Chase (NYSE: JPM), one of the major players in the SIV bailout, may not be a big player in the creation of SIVs, but its mutual funds do hold a lot of mortgage-backed and asset-backed securities. While not all of these securities are in trouble, you should take a close look at any mutual fund that has a significant exposure to the types of securities tied to the current credit mess. In reviewing JPMorgan bond funds, I found a number of funds with significant exposure to these securities:

As of 9/30/2007, JPMorgan Ultra Short Duration Bond Fund holds 55.1% of its portfolio in collateralized mortgage obligations, 16.7% in mortgage pass-through securities, and 15.1% in asset-backed securities. That's a huge bet on the areas of the credit markets that appear the most at risk of default right now. The mortgage mess is not going away any time soon. If you do hold this fund, you need to ask yourself, do you want that level of exposure?

As of 9/30/2007, JPMorgan Core Bond Fund holds 46.6% of its assets in collateralized mortgage obligations and 10.3% in mortgage pass-through securities. That's more than half of its assets tied to the mortgage mess. Were you expecting this type of targeted investing when you chose this fund?

Ever since the Super SIV (structured investment vehicles) story broke last week, I've been seeing hints that mutual fund shareholders might be caught up in the mess and not even know it. Well it's true. I've found significant holdings in non-government backed collateralized mortgage and asset-back securities in a number of mutual funds. That means if you have a mutual fund with a security that does default, that mutual fund will have to write-down those assets and may have to lower the Net Asset Value (NAV, essentially the selling price) of your mutual fund.

I've found significant holdings in various types of bond funds, including Total Return Bond Funds, Short-Term Bond Funds and Ultra-Short Bond Funds. There are thousands of funds out there, so I can't guarantee I've located all the funds with possible problems, but I can tell you what to look for in any funds you hold.

If your funds hold primarily bonds graded lower than AAA, it's worth a closer look. Next, look at the mortgage and credit holdings of the fund. If your fund holds a significant amount of mortgage pass throughs, collateralized mortgage obligations (CMOs), commercial mortgage-backed securities (CMBS) or asset-back securities (ABS), these could be the types of securities that are now tied up in the Super SIV story. In order to know whether or not you have a problem, you would need to look at the actual portfolio holdings and find out exactly what is being held.