What are Mutual Funds Fees?

what are mutual funds fees really?Our investment blog agrees that the devil is in the details everywhere in life, especially where your money is concerned. One of these details is knowing how mutual funds work and what are mutual funds real costs; that is, above and beyond the basic management fee and 12b-1 fees everyone talks about.

You worked hard, maybe got lucky in the markets, or inherited some money, but if you do not tend to the financial garden, your money may be ravaged by fickle markets, taxes, fees, and inflation.

The details are exactly why you entrusted your money to a financial advisor in the first place. Let’s review a good guy, Frank, who came to see us recently. He is a lot like many we’ve advised over the years. He is 69, retired, and has two grown kids, and five beautiful grandkids. He wants to live long, prosper, and have something left over to gift to them, if he can.

I have seen it before, the sea of emotions that walks in the door with a new client. He had the look, as I like to call it. He had something weighing on his mind. Most people have emotions from a sense of urgency, to downright fear, to confusion surrounding their investments. I knew to inquire about his forlorn face, and he confided in me that he felt confused and concerned, because he was certain his financial advisor charges 1 percent for financial planning services.

When Frank reviewed his family’s financial portfolio and asset allocation, the numbers did not add up. The returns, he added, were lower than they should be according to a 1 percent fee. Frank’s suspicions were correct, though point to a bigger and more prevalent issue: the financial literacy in understanding investment costs.

His concerns were my concerns, but I had solutions to offer. First of all, I congratulated Frank on his courage, which involved listening to his gut, and bravely reading through his portfolio to see that the numbers did not add up the way he expected.

What are Mutual Funds Total Fees Really

It wasn’t that he didn’t know how mutual funds work, he just made the mistake of only seeing the clearly defined advisor fee, 1 percent for his broker’s services. There is another layer, and it encompasses the whole expense of the investment strategy. Normal additional fees and expenses beyond the 1 percent to the broker are not necessarily found in a mutual fund prospectus either.

For the $1 million Frank invested in 10 separate “growth” mutual funds, made up largely of stocks, there were many other hidden costs. The Wall Street Journal reports, on average, some of even the best mutual fund operating costs are close to 1.3 percent of total assets. Unlike transactional fees, the operating costs can be located in the mutual fund prospectus.

What are Mutual Funds Transactional Costs

Transactional costs are the price to make trades, and according to Forbes Magazine, we should expect to add up to approximately 1.4 percent of assets in a fund. Such mutual funds buy and sell stocks, securities and bonds daily. The individual investors, like you, pay the expenses. Though, these expenses are hardly ever found in a mutual fund’s prospectus. I have yet to see them on brokerage statements either.

What are Mutual Funds Cash Drag Costs

Mutual funds also have the added built-in cost of a cash drag on them. This is what gives the fund the cash available to meet the fund’s liquidity needs. Such cash drag runs another .8 percent. This expense is determined from investors paying the fund’s operating costs on 100 percent of its assets, even though not all assets are invested.

If you have been running a tally so far, the total expenses just to invest in a mutual fund, even the best mutual fund on the planet, is typically 4.5 percent, far greater than Frank’s original assumption of 1 percent.

Average mutual fund fees:
1. Operating Costs 1 percent
2. Transactional Costs 1.4 percent
3. Cash Drag 0.8 percent
4. Advisor Fee 1 percent
Total Expenses: 4.5 percent

Next, we walked through and analyzed investment behavior for bull and bear markets. Good thing we did, because his portfolio had significant risk (remember, he was invested fully in “growth” mutual funds) and had no downside protection. From there, we found an opportunity to minimize his expenses and lower his portfolio risk.

Markets tend to see correction every five to seven years, and Frank’s future strategy should focus on managing that big downside risk to tough it through more bearish years. For perspective on tough downside risk years, think back to 2001, 2002 and 2008. It is not always a matter of what you earn, but often what you are able to keep. With $1 million, Frank has something good going, and he cannot afford to lose half of his money because he did not consider potential negative market cycles.

Frank’s other opportunity to save money comes by considering asset management strategies with a flat fee, but includes all of the above-mentioned expenses. It is simply more transparent, easier to understand, and actually about half the cost, and often more efficient.

Seeing the calculations in front of him, realizing that his hunch was right, and now understand what his fund was actually charging, all caused the mental fog to lift. I could feel his relief.

Our solution is to provide the difference offered by Wisepath Financial. It differs from mutual funds in the traditional sense, and has advantages over even low risk mutual funds. Unlike even the best mutual fund, private wealth management funds have substantial advantages to offer for downside protection.

The clincher is that private wealth management funds are able to move 100 percent of cash if the market appears to pose a great risk. Even by reading the best investment blog, you may not have learned that even the best mutual fund is required to stay at nearly 80 percent risk, even when there’s a precipitous drop in the markets, warranting pulling back on stocks. Add to it that there is no front-end load to invest with private wealth management funds and the advantages start piling up.

See how these small differences have had a big effect? That’s the devil in the details.

The other aspect of the Wisepath Financial difference is in the people. Frank had a broker, who is only paid if a client is fully invested; meaning, there is incentive to sell Frank on putting all his money into markets and tell him to hold out for the long run even if Frank’s “long run” isn’t as long as it once was because he plans to retire in 7 years.

In addition, many big brokerage firms and big investment houses pressure its brokers to only sell its own products to rake in more money, whether or not its in the interest of its client. I am, on the other hand, a fiduciary advisor, who looks out for your best interest, above and beyond myself and my company. We work hard for you at ensuring a tactical asset allocation.

Finally, wondering how we treat investment fees? We bulk them together and make them flat, so you know up-front what all of your costs are to invest.

Get an expert to evaluate your mutual funds and other investments with sophisticated software to show you their risks and compare them to some other possibilities that may work well with your investment strategies, contact us and can show you a few pretty interesting things; like funds that did not lose money in 2001, 2002, or 2008.



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