Myth #3: Fees Don’t Impact Investing

Summary:  When mutual fund manager’s state their fee, they are often stating their management fee and not the total fees. In a March 2010, Wall Street Journal article titled “The Hidden Costs of Mutual Funds,” the author wrote that the average fund manager charges 1.3% per year as a management fee (according to Morningstar). However he goes on to address that this stated management fee is just one of many fees that are being charged, rarely disclosed and expertly concealed:

fees-impact-thumb“There are other costs, not reported in the expense ratio, related to the buying and selling of securities in the portfolio, and those expenses can make a fund two or three times as costly as advertised.”

This means that when all fees, hidden and disclosed, are added together, its more likely that fees average closer to 3% per year.   To be clear, this on the total value of your account! If you invested $100,000 and the market didn’t advance over 10 years (ie. 2000 to 2010), the fund still earned 3% each year or approximately $30,000 in fees over the 10-year period. This leaves you with a balance of $70,000. The vast majority of Americans invest in mutual funds via their 401k plans. So in addition to the mutual funds fees, there are additional fees that plan sponsors charge. Below is a list of some but not all of their fees:

  • Revenue Sharing Fees
  • Finders Fees
  • Surrender Charges
  • Shelf Space Fees
  • Wrap Fees
  • Custody and Trustee Services
  • Termination Fees
  • Soft Dollars
  • 12B-1 Fees
  • Professional Services
  • Advice Fees
  • Administration Fees

However, many of the above fees are not listed in the prospectus or annual report. They are listed in the statement of additional information, a special document one must request from the fund provider.  The above chart shows the impact of fees on growth. Assuming an 8% annual return, you can see that an account with $1,000,000 at the beginning will be drastically impacted over a 30-year period. The difference between 1% and 3% percent is over $3 million dollars in fees!