Do you know your fund costs? (55, financial advisor, state, retiree)

[Aisa]

If you own mutual funds, you should know what you are paying for the, The fees really add up. We'll go step by step using Morningstar, a respected site that gives information about investments. You’ll need your investment statement.

1. Take a look at your investing statement and see if you can find your fund's 'ticker'. It's usually 5 letters that represent your fund. An example of a ticker is 'VFINX'. (If you can't find a ticker, then we’ll use the fund name.)

2. Next, we’ll open a second internet session to access Morningstar, You will be bouncing between this screen (for instructions) and Morningstar.

Go to Morningstar


3. In the upper left corner on Morningstar where it says ‘Quotes’, enter your fund's ticker and click the arrow. If you couldn't find the ticker, enter the fund name. If your fund doesn't come up, enter the name of the fund company (examples: Vanguard, American, Riversource, Columbia, T Rowe Price, etc) and look through the list of funds for your fund.) Write down the ticker and click on the fund name.

Note: If you have a problem, please post the fund name and I will try to assist.

4. You will now see a 'snapshot' of your fund's information. But for now, we want to look at the costs. On the left side of the screen, left of the chart, look for 'Fees and Expenses' and go there.

5. Now you can see your fund's costs. (For a detailed explanation of all costs, look at the 'Data Definitions' on the lower section of the page.) In brief, a ‘load’ is a sales commission, usually taken right off the top of any money you invest. This pays your broker (financial advisor). A 12b-1 fee is called a marketing fee but is usually also used as a hidden commission. All funds have a fund management fee, but the cost of management can be very different between funds.

Let's use Vanguard's S & P 500 index fund as a comparison with your fund's costs. Take a look at the Vanguard index fund and see how your costs might differ.

6. Finally, take a look at the rest of your funds to find out what you are paying for your investments.

You now know what you are paying for your fund fees and commissions.

Next, your should find out what you're paying your 'financial advisor' for his advice. Usually, they are paid one of three ways:

Commission:

This means they sell you loaded funds...funds with commissions. The commission can come off the top - a front end load. You can see the load disclosed on the Morningstar fees and expenses page you looked at earlier. You might have been sold a 'B' or 'C' share. These funds don't charge a front-end load, but they do charge an ongoing commission in the form of a higher 12b-1 fee.

Let's look at an example of the same fund with different share classes:

Class A - Front end load (note the 12b-1 fee):
RiverSource Global Equity A Report (IGLGX) | Fees & Expenses

Class B - Deferred load (note 12b-1 fee) that is higher but reverts to A share costs after a few years
RiverSource Global Equity B Report (IDGBX) | Fees & Expenses

Class C - Deferred load (note 12b-1 fee) that is higher and stays high
RiverSource Global Equity C Report (RGCEX) | Fees & Expenses

In addition to these commissions, your financial advisor may also charge you a planning fee and may receive other forms of payment.

Note: If you invest a large sum of money in a loaded fund, you should pay a reduced load - this is called a breakpoint.

Fee based:

This usually means that your financial advisor charges you a percent of your assets every year. Let's assume you have $500,000 invested and your wrap fee is 1.5%. You will pay $7,500 that year to your advisor. That's $625 a month. Remember that in addition to the wrap fee you will pay fund expenses, but not the load. A fee based advisor may also take commissions, just not in the form of a load.

Fee only:

A fee only planner does not take commissions. They may charge a percent of your assets, or a flat (one time) fee, or an hourly fee.

Ask your financial advisor to provide, in writing, exactly how he is paid and how much he receives. Do not be afraid to do this. It is your money, your financial future and if he has a problem giving you this information in writing, you have a serious problem. Do not let him make you feel guilty. Do not let him intimidate you. If this is hard for you to do, ask in an email.

Now you can add up all your investment costs….Now you know what you are paying for your investments.

Important notes:

Index funds are passively managed (meaning that they follow a formula and do not try to guess which stocks will beat the market) and are usually much cheaper to own than actively managed funds. Consider: Over the past five years, the S&P 500 has outperformed 72.2% of large-cap funds, the S&P MidCap 400 has beaten 77.4% of mid-cap funds, and the S&P SmallCap 600 has outpaced 77.7% of small-cap funds. Since no one knows which funds will beat their index in the future, doesn't it make sense to stack the odds in your favor and hold index funds?

Wrap fees (percent of assets) continue for year after year after year - even if your advisor does a bad job. Even if you lose money. And, I have never been able to find out what a financial advisor does to earn this money ongoing. He sets up your portfolio, etc, the first year, but what happens after that, ongoing, that takes up as much time as the first year?

Consider that the safe withdrawal rate in retirement is considered to be 4%. (This is what you can safely withdraw from your investments and not run out of money before you die). It's typical for clients to pay 2 - 3% of their investments in wrap, commission and fund fees. What does that leave the retiree? Not much.

Let's look at the impact of fees, over time, on your nestegg. The table below (used by FINRA/NASD to educate investors) assumes you invest $2,000 on January 1st of each year and earn a 10% rate of return before deducting fees.

The Balance after 5 Years 10 Years 20 Years 30 Years 40 Years

Mgmt. Fee @ 0.02% $13,423 $35,022 $125,696 $360,454 $968,249

Mgmt. Fee @ 0.25% $13,334 $34,556 $122,204 $344,402 $907,762

Mgmt. Fee @ 0.50% $13,238 $34,077 $118,528 $327,816 $846,479

Mgmt. Fee @ 1.00% $13,047 $33,121 $111,529 $297,150 $736,584

Mgmt. Fee @ 2.00% $12,672 $31,291 $98,846 $244,692 $559,562

Mgmt. Fee @ 3.00% $12,307 $29,567 $87,730 $202,146 $427,219

Think about the numbers on this table. It is common for people to be paying
2, 3 and even 4% in combined mutual fund and advising costs. If your investments are costing 3.00%, your nestegg will be some $541,000 lower after 40 years than if you used low-fee investments and did your own investing. How many years of retirement is that?

Please don't lose your nest egg to fees.