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Going Granular and Deep with Obligatory “Fund Facts”
SPONSOR: http://www.MARCINKOASSOCIATES.com
[By Dr. David Edward Marcinko MBA CMP™]
An attractive investment and a polished sales pitch can often hide the underlying costs of the investment, leading some medical professionals to give up a significant portion of the long-term growth of their assets to fees. Fees absolutely matter.
In a good market investors have a propensity to ignore them and in challenging markets they are scrutinized, but in the end no matter what type of market we are in fees do make a substantial difference in your long-term investment returns.
Assessing the Worth of the Investment
The first step in assessing the worth of the investment under consideration is figuring out what the fees actually are. If a medical professional is investing in a mutual fund, these costs are found in mutual fund company’s now obligatory “Fund Facts”.
This manuscript clearly outlines all the fees paid – including upfront fees (or commissions/loads), deferred sales charges, and any switching fees. Fund management expense ratios are also part of the overall cost of ownership. Trading costs within the mutual fund can also impact performance.
The List of Fees Keep Coming … and Coming!
Here is a list of the traditional fees from investing in a mutual fund:
- Front end load: It is the commission charged to purchase the fund through a broker or financial advisor. The commission reduces the amount you have available to invest. Thus if you start with $100,000 to invest and the advisor charges a 5 percent front end load, you end up actually investing $95,000.
- Deferred Sales Charge (DSC) or back end load: Charge imposed if you sell your position in the mutual fund within a pre-specified period of time (normally five years). It is initiated at a higher start percentage (i.e. as high as 10 percent) and declines over a specific period of time.
- Operating Fees: These are costs charged by the mutual fund including the management fee rewarded to the manager for investment services. It also includes legal, custodial, auditing and marketing.
- Annual Administration Fee: Many mutual fund companies also charge an additional fee just for administering the account – usually under $150 per year. A 1 percent disparity in fees for a medical professional may not seem like a lot. But fees do make a considerable impact over a longer time period. [For example, a $100,000 portfolio that earns 8 percent before fees, grows to $320,714 after 20 years if the client pays a 2 percent operating fee. In comparison, if the investor opted for a fund that charges a more reasonable 1 percent fee, after 20 years, the portfolio grows to be $386,968 – a divergence of over $66,000! For many investors, this is the value of passive or index investing. In the case of an index fund, fees are generally under 0.5 percent, thus offering even more fee savings over an elongated period of time].
***
[The Carousel of Fees]
Assessment
Fees and expenses can have significant impact on the performance of your investments. Always monitor the costs of an investment program to ensure that fees and expenses are reasonable for the services provided and are not consuming a disproportionate amount of the investment returns.
Conclusion
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Filed under: "Ask-an-Advisor", Accounting, Experts Invited, Financial Advisor Listings, Financial Planning, Investing, Marcinko Associates, Taxation, Touring with Marcinko | Tagged: David E. Marcinko, deferred sales charges, Failure to Recognize Mutual Fund Fees, Front end load, Fund Facts, Mutual fund expense ratios |
The Leading Business Education Network for Doctors, Financial Advisors and Health Industry Consultants 
Fees
Dr. Marcinko – You are so right – Paying even an extra 1 percent a year can really add up over time. Here’s an example from the Securities and Exchange Commission:
If you invested $10,000 in a fund that generated a 10 percent annual return and had annual operating expenses of 0.5 percent, after 20 years you’d wind up with $60,858.
If the fund carried a higher annual expense of 1.5 percent, you’d end up with only $49,725 — a difference greater than the original sum you invested.
Flint
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High [401-k and 403-b] Fees
Agreed – Between plan administration fees, investment fees, individual service fees, sales charges and management fees, some of these plans will cost more than you expect.
You may not even be making enough in interest to negate these fees. So, beware!
Thanks Dr. M.
Chad
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Fees
Dr. Marcinko – If you look at the Dow Jones Industrial Average over the last 90 years or so, the average return after inflation is around 4%. When marketing folks tell you that 8% is achieve-able, they are talking about bull market periods, ignoring the downturns and also ignoring inflation.
So, understand that when just over an actual 4% may be achieve-able over the long term, the 0.5% fee removes about an eighth of your profits. If the marketers told this basic truth, a good share of investors would demand that fees be cut in half or more.
Anthony
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12b-1 Fees
12b-1 fees are annual marketing or distribution fees on some mutual funds. These fees are typically included in a fund’s expense ratio. Initially, 12b-1 fees were introduced to help investors by marketing a mutual fund to yield higher assets and lowered expenses. However, some argue 12b-1 fees can bring down your returns instead of improving your fund’s performance.
This past September, the Security and Exchange Commissions (SEC) filed proceedings against First Eagle Investment Management, an asset management company that allegedly improperly used investors’ mutual fund assets for payments to cover “marketing and distribution of fund shares.”
According to the Wall Street Journal, “First Eagle dipped deeper into funds’ assets than allowed under a plan known as 12b-1 plan.” First Eagle will have to pay $25 million to reimburse shareholders, plus pay interest and a penalty of $12.5 million, reported Reuters.
Marshall
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Beware These 3 Investment Hidden Costs
Let me explain …
Load is the initial kickback (coming directly from your account) the fund gives to the broker for directing money to the fund. There are so many no load funds out there, you shouldn’t be paying load. A broker only does that to line his pocket, there is no benefit to you whatsoever.
Expense ratio is what the fund charges every year. As my rule of thumb, any expense ratios higher than 0.5% are too high. Any expense ratios higher than 1% are exorbitant. As you can see, all the fund expense ratios here are either too high or exorbitant! The broker who directed your money to these funds gets to share a portion of the loots ever year. Can you see a conflict here?
Turnover is how often the fund manager churn the investments. The higher the churn rate, the higher the costs to investors. Typically, a 100% turnover translates into about 1.2% in return reduction. As my rule of thumb, any turnover higher than 10% is too high, a turnover higher than 100% is exorbitantly costly!
With this portfolio, you can easily give up 1.5% of return every year to various hidden costs. That does not sound like a lot, but over ten years, you will give up 15%, over twenty years, you will be 30% poorer.
All because you thought a broker is a “financial advisor.”
Michael Zhuang
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