1,400%? The Hidden Fees of Mutual Funds

When you sold your last home, was it free to do so? Likely not. If you hired a realtor (which I suggest) you likely paid a commission from the proceeds for his or her expertise and effort. That’s reasonable considering the fact that selling a home is not something you do everyday and pretending to be an expert can be harmful to your financial health.

Buying and selling mutual funds is much the same. Each time your fund manager buys or sells stocks or bonds inside your fund, they incur transaction costs. This is also called “Turnover Cost” and the more often your investments are turned over, the more it costs you. There are certainly justifiable reasons why your investments should be changed, but I want to ask you a question.

If the mutual fund industry touts a “buy-and-hold for the long-term” investment strategy for you, then shouldn’t they practice the same strategy inside your funds? In other words, wouldn’t you expect your funds to have low turnover and consequentially low turnover costs? Have you ever looked to see what your turnover costs are in your funds inside your 401(k) or IRA?

The performance of the market is certainly out of your control. But owning investments that manage costs well compared to similar investments IS within your control. We have one client who, before meeting with us, owned a substantial amount in a mutual fund that had a 1,400% turnover ratio. That means the fund manager sold and re-bought the investments in the fund 14 times during the year! Needless to say, it was not a very efficient or profitable investment to own.

Typically, mutual fund costs are understood to be those that appear in the fund’s prospectus. The “Expense Ratio” is the calculated cost that mutual fund companies are required to disclose. Other costs are often difficult to determine and account for, but they are there. In a very popular Wall Street Journal article, many of these costs were identified to a shocked audience.

Although mutual funds remain a wonderful option for smaller investors, allowing diversification and professional management for small amounts of money, investors who are further along in their accumulation may have earned the right to invest differently and more efficiently. Specifically, investors with $100,000 or more of investments may want to consider the merits of institutional investing. Seeking the counsel of a Registered Investment Advisor firm (RIA) may allow you to take back control in the area of investing expenses. After all, when costs are controlled, that money is able to remain in your account, working for you. Maybe it’s time you graduate from the “retail” world of investing.

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Source by Adam Cufr

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