Focusing in On Mutual Fund Fee’s
Let’s briefly review how paying a 1% higher fee can impact a portfolio ending value. An initial investment of $10,000, into a mutual fund with a 1.5% expense ratio, assuming no other contributions, and a 7% annual return will grow to $29,177 after fees are paid to the fund company. The same investment with only a 0.5% annual fee will grow to $35,236. A difference of $6,059. Remember that’s only a $10,000 portfolio. If you have $100,000 initial investment you are talking about a $60,000 plus difference in portfolio value over 10 years!
There are two main components of mutual fund fees: net expense ratios (often referred to by its acronym NER) and sales loads. Net expense ratios cover the fees paid for running the mutual fund. These fees include investment advisory fees, administrative costs, 12-1 distribution fees and other operating expenses. Separate from the fees included in expense ratios are sales loads. Sales loads range from 0.25% to as high as 8%. Simply put, these are fees charged to investors when they either buy or sell their mutual funds.
There are over 25,000 registered mutual funds in the U.S. with fees ranging from 0.2% to as high as 8%. How do advisers decide on which fund family to buy for an investor? Hopefully they focus on getting the lowest fee funds with the best statistical performance measures . It possible that a bigger determining factor may have to do with the compensation the mutual company provides to advisers in return for using their product.
Here are some tips that may help the average investor investor better understand the fees they are paying.
Ask you adviser how they are paid. Are they fee-based, commission based or both? They should be able to relatively easily give you a dollar value or yearly percentage fee. Make them put it in writing!
Ask if they or their brokerage is compensated by mutual fund companies for using their funds. If they are compensated by fund companies ask for list of fund families they have selling arrangements with.
Inquire as to what the process your adviser goes through to select the mutual funds. Most advisers should have a well-documented mutual fund screening process that should be easily explainable even to the average investor.
Try to keep your investment fees at or below 1%. There are few cases where fees can be slightly higher but if you adviser is “working” for you they should be able to get a mutual fund line up with fees that are mostly below 1%.
Ask you adviser about exchange traded funds (ETF’s). Exchanged traded funds often have fees that are a fraction of the cost mutual funds.
Look to see if you the majority of mutual funds come from the same fund company. There are over 25,000 mutual funds in registered in the U.S. Some fund companies are better at managing equities and others better at managing a bond portfolio. A platform that has an “open architecture” allows advisers to seek out the lowest fee and best performing mutual fund from multiple mutual fund companies. It is an essential aspect of developing the highest quality retirement portfolio.
Check you adviser’s credentials. SEC’s IARD system allows investors to pull up the basic credentials of advisers and who they have worked for. The link is http://www.adviserinfo.sec.gov/IAPD/Content/Search/iapd_Search.aspx
The most important thing to remember is to ask questions!
Judson Ames, CHARTERED RETIREMENT PLAN SPECIALIST
Owner of Dark Horse Wealth,
9 Albany St