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Last Updated: Oct 26th, 2008 - 17:41:44 |
What are your Mutual Funds REALLY Costing You?
By Darrin Critchet
Do you know all the charges you are paying for your financial portfolio? Are you receiving full disclosure from your advisor?
Consumers often turn to a financial advisor for assistance in making wise investment decisions. A skilled financial advisor has the ability to help you design a portfolio to meet your particular needs and goals. In this process it is important to understand all the costs you pay when you invest.
The first question you want to ask your advisor is what fee they charge.
However, this is not the only question you should ask, often there could be a big difference in what the advisor charges and what you pay.
The asset management fee is the first cost you pay, also known as the
advisor's fee. This cost can be as high as 3% a year at some companies.
Usually 25% of this cost is charged up front to your account each quarter of the year. This means less of your money is being invested each quarter. As a result, your quarterly returns could be less. At Safe Haven Financial we charge the fee at the end of the quarter. Every Advisor is required to provide their clients with complete details on their fee. These details are found in Federal Disclosure Form ADV (Part II & Schedule F).
However, the advisor's fee is not your only cost, you must also pay for the funds your advisor recommends. Here is where you find the other two costs. They are called fixed expenses, and variable expenses.
Fixed expenses are a part of what is called: The Annual Expense Ratio. Every mutual fund and exchange traded fund charges this fee, even so called "no load" funds. The expense ratio pays for the fund's recurring operating costs. The average expense ratio according to Morningstar is 1.56% per year. Many are more than 2%. The expense ratio is actually charged daily. However, you never notice it. It does not appear on monthly statements. You must look up the cost in the fund's prospectus where it is shown as a percentage.
Mistakenly, many investors, as well as a surprisingly number of investment advisors, think this covers all fund expenses. This is not correct. The expense ratio only covers recurring fixed costs. There are also variable costs. These costs are not included in the expense ratio.
Brokerage commissions and trading expenses are the biggest variable costs. A fund manager must pay a brokerage commission whenever he buys or sells a security. You would also have to pay this commission if you were to buy or sell a stock or bond. When you take into account that funds trade millions of shares; you can conclude that their trading costs are huge even though they pay a discounted rate. And consider this: the more a fund trades, the more it spends on brokerage commissions. Usually funds spend millions and millions of dollars in trading costs per year, and these costs are not included in the annual expense ratio. In fact, they are not even revealed in the prospectus. You have to look in the fund's Statement of Additional Information to find these costs.
This can be difficult as financial advisors are not required to provide you
with this statement of additional information. In addition, reading the SAI can be a real pain. It is drier than leftover turkey and makes the
prospectus look like a child's book. I think you get my point. In fact, many advisors have never even heard of the Statement of Additional Information (SAI). The costs this document shows can equal or sometimes surpass the annual expense ratio.
While researching this article I came across a lot of funds with trading
turnovers of 200%+. According to personalfund.com, average fund turnover of 100% will equate to 1.24% in fees for the fund investor. Thanks to the Internet you can now find the SAI at most of the fund company's web sites. Prior to this, you had to request fund companies to mail the SAI to you.
SAI expenses are sometimes hard to figure out. A 2007 analysis by Virginia Tech, The University of Virginia and Boston College has shown that the average charge is 1.44% per year. When this is added to the 1.56% charged by the average annual expense ratio, the total charge of the average mutual fund could be 3% per year. When you add this to your advisor's fee, you can conclude that an ordinary investor could find himself or herself paying 4% or more per year in total annual costs. You, as the consumer, need to know the total costs you may incur when investing.
Here at Safe Haven Financial we provide our clients with portfolios based on Asset Allocation, Diversification, Modern Portfolio Theory, The Fama-French Three-Factor Model, and The Efficient Frontier. We help you develop a portfolio that is right for your situation. A portfolio designed to meet your particular goals. One than can produce higher returns at lower risk.
Give us a call today at Safe Haven Financial. We will give you a free
portfolio review. Phone us at 419-355-9107.
Expenses of Working with a Financial Advisor
Please Compare the Safe Haven Financial Cost with Other Advisors
Industry Average Safe Haven Financial
Annual Expense Ratio 1.56% .33%
Advisor Fee for $250,000 Account 1.39% 1..00%
SAI Charges 1.44% 0.07%
TOTAL 4.39% 1.40%
Sources: Virginia Tech, University of Virginia and Boston College,
Morningstar.
Safe Haven Financial offers securities through OBS Financial Services, Inc. OBS Financial Services; Inc. is a registered investment advisor. This
article is not intended as, and does not constitute an offer to sell or
solicit any person to purchase securities. Investment decisions should not be made based on information in this article. Prospective investors need to carefully consider their investment objectives, risk factors, and expenses before investing. Be sure to read the prospectus carefully before you make an investment decision.
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