Buying my first car in 1981 was a great learning experience. After signing on the dotted line, and agreeing on what I thought was the final price, I was sent to the Director of Finance only to learn that the price I negotiated wasn’t the final cost. I knew I had to pay extra for floor mats, some made up fee called dealer setup, rust underlayment, and a few other fees that added nearly $500 to the $6100 cost of my car. I began to realize that what I didn’t know could hurt me or worse, what I thought I knew to be true…wasn’t. You probably feel the same way about your investments. A potential termite in the 2\u00d74 of your investment portfolio could be the fees and commissions you pay to purchase your mutual fund, real estate investment trust (REIT), variable annuity, or other product commonly offered through brokers.<\/p>\n
This article will mainly focus on mutual funds, cost of ownership, and questions to ask your financial advisor trying to make sure you don’t run into certain fees that could have been avoided.<\/p>\n
According to the Wall Street Journal 1, fees have an enormous impact on your revenue earned. Here are some of the ways mutual fund companies reduce investment return through fees, loads, trading costs, platform fees, taxes, marketing costs called 12-b1 fees, bid-ask spreads, and market effect cost. Although mutual fund companies are required to disclose trading costs for the last three years and the prospectus, in some cases it is difficult to determine the actual cost as an annual percentage value.<\/p>\n
Here are some annoying fees that can be avoided or managed.<\/p>\n
1. Buying A Shares – This type of mutual fund has the letter “A” in the name of the fund. This means that there is a forward commission that is paid from your initial investment to the broker. It can reach 5.75%. 2<\/p>\n
Some mutual fund families will give you a price break if you put enough money into their fund family. Ask your broker if you can get a discount by investing more with the same family of mutual funds. In general, stock mutual funds are more suitable for investors who plan to make fewer portfolio changes and who want to stay in the same mutual fund for 11 to 15 years. If you don’t think you’ll be in the mutual fund for long, maybe you should consider buying “C” mutual funds. They generally have higher management fees, but you can change to a different mutual fund without having to pay another commission upfront to the broker if you have to change your mind within the next ten years.<\/p>\n
Let’s take a look at a very popular fund called American Funds AIVSX -Investment Company of America Class A shares:<\/p>\n
The upfront (load) commission is 5.75% – the maximum that can be charged on A shares. Fund turnover rate -23%<\/p>\n
The expense ratio disclosed in the prospectus is 61% however, the fund has the following costs in addition to the expense ratio disclosed.<\/p>\n
Here’s a breakdown of the total cost of ownership: $100 investment<\/p>\n
Your share of fund transactions is $29 \/ .29%.<\/p>\n
The amount you paid to manage the fund $37 \/.37%<\/p>\n
The amount you paid to distribute the funds $23 \/.23%<\/p>\n
Taxes you paid for owning the fund $31 \/ .31%<\/p>\n
Total cost of ownership for one year $120 \/ 1.20%<\/p>\n
Source: personalfund.com<\/p>\n
Now if you include a 5.75% commission, and a 1% advisor management fee, your effective cost of ownership is much higher than the 61% listed as the expense ratio. This fee is paid by the investor. You may not see them, but just as termites run happily in the dark, scurrying away one bite at a time from your home, so these fees quietly devour your return on investment. If the performance is good, you may not mind paying a higher fee. Some mutual funds and many exchange-traded funds have lower fees than these, and many may do better. This is where research and making a good financial planner with analytical skills come in handy.<\/p>\n
This fund has a five-year performance according to Morningstar.com of -22% as of February 2, 2012. By adding any additional costs (1% advisor fee + .59% inside cost and transaction cost + .575% sales commission), the fund has Your annual performance over the past five years would drop to 2.39%. (1.39% if no additional advisor fee is charged.) In other words, on investing $10,000 in this fund, you would have paid $178 per year for the privilege of losing $139 per year. If your retention period is shorter than 10 years, the annual cost may be higher.<\/p>\n
Remember that advisor fees may be tax deductible, but the mutual fund fees you pay generally are not. Most online costing services do not consider advisor fees in their information.<\/p>\n","protected":false},"excerpt":{"rendered":"
Buying my first car in 1981 was a great learning experience. After signing on the dotted line, and agreeing on what I thought was the final price, I was sent to the Director of Finance only to learn that the price I negotiated wasn’t the final cost. I knew I had to pay extra for […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[3],"tags":[],"class_list":["post-55","post","type-post","status-publish","format-standard","hentry","category-morningstar"],"_links":{"self":[{"href":"https:\/\/shopmushroomsonline.com\/index.php\/wp-json\/wp\/v2\/posts\/55","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/shopmushroomsonline.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/shopmushroomsonline.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/shopmushroomsonline.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/shopmushroomsonline.com\/index.php\/wp-json\/wp\/v2\/comments?post=55"}],"version-history":[{"count":0,"href":"https:\/\/shopmushroomsonline.com\/index.php\/wp-json\/wp\/v2\/posts\/55\/revisions"}],"wp:attachment":[{"href":"https:\/\/shopmushroomsonline.com\/index.php\/wp-json\/wp\/v2\/media?parent=55"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/shopmushroomsonline.com\/index.php\/wp-json\/wp\/v2\/categories?post=55"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/shopmushroomsonline.com\/index.php\/wp-json\/wp\/v2\/tags?post=55"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}