Fund expenses are the only thing an investor can control.
They cannot control market volatility, political disputes, oil production, Fed interest rate policy or the decisions made by public companies.
But they have total control over their fund expenses and these represent money that goes directly to any investor’s bottom line.
As noted in the book, How 401(k) Fees Destroy Wealth, the U.S. Department of Labor has identified 17 distinct fees that shareholders can pay when purchasing shares in any mutual fund. This includes the little-known practices of paying 12b-1 fees and revenue sharing that are basically under-the-table payments made between financial advisors who push one mutual fund over another and between fund distributors and other fund companies, including individual 401(k) plan administrators
And just to give you an idea about what fund expenses total over time, here are some startling numbers that represent lost potential returns over time that some of the nation’s largest investment firms receive directly from the bottom lines of their own clients.
According to a white paper from the technologically-oriented investment firm, Personal Capital, “applying the range of fees documented in this report to an average account of $500,000, the costs to a portfolio over 30 years of investing could span from a high of $936,390 for Merrill Lynch to a low of $502,407 for USAA.” (See above chart.) This means that a Merrill Lynch client after 30 years would have paid about $936,000 for what type of services and what kind of return over the benchmarks? That is a lot of free lunches if your actively-managed funds did not deliver superior performance. And the odds of that happening are very slim.
The whitepaper, The Real Cost of Fees, notes that the “practice of charging sky-high fees (average total fee percentages seen below) used to be accepted as the ‘cost of investing’. But, when fees add up to hundreds of thousands of dollars, they merit closer scrutiny. As Bill Harris, Personal Capital CEO, comments, “Investment fees can no longer be justified as a cost of doing business, and brokerages can’t get away with simply hiding fees in fine print. It’s time to create a new normal in the cost of investing, a cost that is in line with the actual value created by a financial institution.”
Fees Are Investment Firm Profits
Similarly the U.S. Department of Labor, which has been waging a battle with the investment industry for about a decade over adopting some form of the fiduciary standard that would inform investors about the inherent conflicts-of-interest inherent in most financial relationships, said: “With 401(k)s and IRAs, individual investors are more responsible than ever for making important investment decisions, and most don’t have the training they need. That means investors are increasingly reliant on the advice they receive. Ideally, your adviser will have your best interest at heart – but that’s not always the case.”
And the millions spent by the financial services industry to lobby against the fiduciary standard is a clear indication that the industry not only does not have the best interests of their own clients at heart, but they are directly opposed to them getting the basic information they need to make intelligent, independent decisions.
So if you think the small fees you pay to your investment advisor don’t matter, think again. In a low-return, volatile investment environment, you (the investor) are taking all the market risk and then paying fees, often for active management, that may not even beat the indexes.
If this is happening to you, get smart. Think about transferring to as discount firm or invest in index funds. Or, you should ask your advisor to cut their fees. You have nothing to lose. After all, it all your own money anyway.
