Beware the Hidden Costs of Mutual Funds
The fees you may not even know you're paying can be hazardous to your investment health.
Your financial portfolio probably looks like alphabet soup, chock-full of investments you probably know little about. Some of those investments—I'm thinking mutual funds here—may not even be beneficial to you.
Yes, you read that right. This financial guy is about to drop a bomb on you about your mutual funds and how they aren't the great deal for your bottom line that you thought.
The reason: They are filled with hidden fees that eat away at your profits. But once you're aware of them, you can more carefully choose the right funds for you and know to work only with professionals who will help you avoid those unnecessary costs.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Do any of these sound familiar: share-holder servicing fee, account manager fee, revenue-sharing fee? The answer is probably "no" for the average investor. Yet those kinds of undisclosed fees are so detrimental to investors that the Securities and Exchange Commission has tried (unsuccessfully) to get Congress to approve more stringent reporting requirements.
The SEC's concern was that the vast majority of investors don't have a clue about what kind of fees they are paying to have someone manage their mutual funds. In some cases, investors don't know the fees exist at all.
Certainly, as even the SEC points out, some transactional fees are fairly transparent, such as front- and back-end sales loads. But other costs, such as management fees and distribution fees, aren't so easy to come across without some digging. They are just reflected in account balances, so investors don't know that these recurring costs have been subtracted and just assume that their balance is showing how well the investment performed.
And that's not what the account balance is showing—at all.
So if you're not making that money, who is?
- The companies that create the funds watch their bottom line expand from the fees they charge to manage and administer them.
- The brokers who sell shares of mutual funds to clients generate commissions and fees for themselves.
A river of money flows through the mutual-fund industry, supporting hundreds of thousands of jobs and creating substantial profits for the companies involved. When any industry becomes well entrenched in an economy and the profits are as large as they are, it invites greater efficiencies, but also potentially disastrous competition in the long run.
Add to this "soft-dollar" payments, in which mutual companies direct trading activity to certain brokerage houses, generating commissions for themselves, and "shelf-space" payments, which are revenue-sharing arrangements for a brokerage recommending a specific fund to clients.
Exactly how much could all these fees cost you? The SEC points out that even small differences in fees can be significant and gives this example: If you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with $60,858.
So what can you do about it?
- You need to take a hard look at your investments and look at your selling and buying activity. If you're buying and selling high-equity funds in a volatile market, you are likely to come out on the losing end. Investors who hold less volatile, more diversified funds fare better at weathering the ups and downs of the market. Consider index funds that have lower expenses and better tax advantages.
- Work with a financial adviser who is compensated on an agreed-upon annual advisory fee, no matter which investments they recommend.
- Don't fall for advertisements and commercials pushing investments with a catchy name or celebrity endorsement. Check the quarterly reports and make reasoned choices.
- After accumulating significant assets, consider moving them to separately managed accounts (SMAs) handled by a reputable custodian. SMAs provide access to professional money management and diversification. They also have potentially lower overall expenses, tax efficiency, customization and control and a tested and effective investment strategy.
If you do your homework, make reasoned choices about which funds you pick or the wealth adviser you choose, and show patience in your investments, the bottom line is more likely to provide you with the life of your dreams.
Andrew M. Costa, managing director and co-founder of Global Wealth Management in Fort Lauderdale, co-authored the book SuccessOnomics with Steve Forbes. He also is co-host of "The Global Wealth Show," a financial radio show on 610 WIOD and iheartradio.com.
Kim MacCormack contributed to this article.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Andrew M. Costa is managing director and co-founder of Global Wealth Management in Fort Lauderdale. He is co-host of The Global Wealth Show, a financial radio show on 610 WIOD and iheartradio.com. Costa, a recognized professional in the investment management business, also has provided financial insight in "The Wall Street Journal," "USA Today" and "Newsweek," and has appeared on CBS, NBC, ABC and Fox.
-
Stock Market Today: Dow Outperforms After IBM Earnings
Investors also parsed a strong reading on second-quarter GDP and a dismal decline in durable goods.
By Karee Venema Published
-
Try the 6 to 1 Grocery Shopping Method to Save Time and Money
The 6 to 1 Grocery Method can help you save money, reduce waste and eat healthier.
By Erin Bendig Published
-
If You're the Millionaire Next Door, You May Be a Terrible Spender
Good job on all that great saving. Now you need to start spending some of that hard-earned retirement savings on the things you love.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
Who Will Be the Beneficiaries of Your Wealth?
Deciding who you want to inherit your wealth, as well as when and how, is a crucial first step in estate planning. Here are the four beneficiaries to keep in mind.
By Adam Frank Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published