Better Understand Investment Fees

An Open and Thorough Discussion of Fees.

Controlling your investment expenses is a critical component of investment management that should not be overlooked. Keeping fees to a minimum will allow you to retain more of the market’s returns.

Look for an advisor who is an open book regarding the fees their clients pay. Fees are relevant and one of the determining factors of how quickly your assets will grow. Your advisor should have a commitment to do what we can to keep the fees you pay to a minimum. You deserve nothing less.

The following are typical fee categories that investors are subject to:

Investment Advisory Fee (Management Fee).

This fee compensates the investment advisor for the initial and ongoing investment management and oversight of the account. Many investment firms also provide performance reporting and periodic client consultations as part of the overall investment management process.

Many firms offer a tiered fee schedule that allows larger accounts to be charged a lower fee percentage.

Custodian Fees.

The custodian of your account safeguards the assets, collects dividend and interest payments on your behalf, and performs recordkeeping and tax reporting functions. The custodian, in most cases, will be the firm you send your deposits to and the company that prepares and sends your monthly or quarterly investment statements. Your investment advisor may or may not work for the company that provides custody services for your account. Custodians charge fees in a number of different ways.

The two primary fees that clients will pay custodians are asset based fees and transaction fees. Asset based fees are charged in a manner similar to investment advisory fees, based on a percentage of asset under management. Transaction fees are charged when a security is purchased or sold in your account.

Mutual Fund Expense Ratios.

Mutual Funds expense ratios are somewhat of a mystery to many investors. These expenses range from below .1% for some index ETFs and go up to over 2% for some actively managed mutual funds. This is a significant difference in cost that can result in drastically different investment returns. These fees are not painful for investors to pay, because they are wrapped into the daily pricing of the funds and are virtually invisible. In other words, an investor never writes a check for these fees nor is there a line item on a statement showing these fees were deducted. The fees generated from the expense ratio of mutual funds are used to compensate many people: money managers, investment advisors, administrative staff, distributors, custodians, and others. In many cases, a mutual fund company will offer several share classes for the same fund with the primary difference between the share classes being the size of the expense ratio. The fund company is required to disclose its expense ratio in its prospectus, so read it carefully.

The foundation of our clients’ investment portfolios is primarily Vanguard funds. Over the years, Vanguard has positioned itself as the ultra low cost fund company in terms of mutual fund internal expenses. One of the reasons Vanguard’s performance is so difficult for other providers to match is because their internal fund expenses are much lower than the industry average. An investor that owns an XYZ company mutual fund that carries a 1.3% expense ratio has their work cut out for them if they are comparing their performance to a Vanguard portfolio that has average expense ratios in the .2% range. The XYZ company portfolio would need to perform over a full percentage point higher than the Vanguard portfolio just to attempt to justify the higher fees.

Some industry sales people get paid by these expense ratios and clients aren’t always aware of this compensation, because the fees are somewhat invisible. Buying funds with high expense ratios is rarely in the clients’ best interest.

Loads.

Loads are sales charges paid by an investor that buys shares in a loaded mutual fund. There are a number of different types of loads, but two of the most common are front-end loads (sales charge paid at purchase) and back-end load (sales charge paid at sale).

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