Myths and Truth – Fees and Costs Matter
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by: MattCBA
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If what you thought to be true turned out not to be true, when would you want to know that? Would it disturb you to discover that you probably are (unknowingly and unnecessarily) paying more than 6% in your investments each and every year (which is almost like betting against one of the most powerful forces in the universe — the power of compounding)? Before inflation? Before paying advisory fees?
Well unfortunately this may disturb you…
Few of us ever read a mutual fund’s (MF) or exchange traded fund’s (ETF) prospectus, which reveals the Net Expense Ratio (NER). That is normal. It is filled with “legalese”, in small font, and is ever so boring.
According to Morningstar the average stock mutual fund NER has risen (sneakily, but ever so steadily) from 1.39% in 1987 to over 1.52% by October 2010; and that number may continue to head toward 2%. Higher still are “small cap” funds — NER of 1.61%, international funds – NER 1.68%.
Even fewer of us read the Statement of Additional Information (SAI), which describes the activities and additional fund expenses, costs, and fees. One of the most misunderstood or understated of these is the trading activity within the fund.
Morningstar shows that the average mutual fund has a stock turnover of about 115% per year every year. How is that for activity? That means if there are 100 stocks in a particular fund at the beginning of the year, by the end of the year at least 100 of those same stocks have been sold, then others bought and some of those are sold with yet others bought—often repeating the same stocks.
The SAI-reports that additional Trading Costs, on average, approach another 1.44% per year (for the period 1995-2005), according to Roger Edelen of Boston College and Richard Evans of the University of Virginia and Gregory Kadlec of Virginia Polytechnical Institute in their article Scale Affects in Mutual Performance reported in a 2007 Registered RepresentativeMagazine. (And according to fundpolice.com the Zero Alpha Group tracks undisclosed brokerage costs and they calculate the average fund annual expense ratio to be 1.72%*).
Moreover, these trading activities also cause taxable events costing investors to lose on average an additional 2.5% of their returns to taxes on (embedded in the fund) long and short term capital gains (not to mention dividend taxation) each year asrevealed on the SEC website in 2006.
Thus, to determine the true cost of only a mutual fund all these fees must be added together which would make the industry average 4.01 to 5.46% per year, according to Ray J. Shreder, RFC, CRC, AIF.
On top of all that, the average financial advisor fee is 1.41% according Tiburon’s Strategic Advisors, the fee-only financial advisors’ Best Practices Survey.
On the “My Money Blog” website, Morningstar admits that fund expenses are more important than “star ratings” and this was reported on August 17, 2010. According to Allan Ross of CBS moneywatch.com August 17, 2009 “Mutual fund fees jumped 5%.”
Oh, and did we talk about the custodial fees of 0.06 to 0.25% for Schwab or TD Ameritrade or Fidelity or Wells Fargo to hold your assets? Or the cost of trading the funds themselves? Someone has to get paid for that, too, averaging 0.2%.
What does that all mean? Summit’s research shows, using outside funds, total costs to you can exceed 4.77%. So your fund must earn almost 5% for you to break even!
What is the solution?
Summit’s Seven Factor model reduces costs, fees, and taxes; as well as, controlling and managing risks, while achieving a well diversified portfolio of 12,000 of the world’s greatest companies properly allocated within your risk tolerances time horizon and purpose for money and diligently rebalanced.
Because of the previous data we’re not big fans of ETF’s or mutual funds because of these high expenses. Rather, we prefer the institutional structured fund model that complies with the Center for Research of Security Pricing — low turnover, low transaction costs, and low trading costs. These funds are not required to buy high and sell low — as opposed to most index funds. Summit is able to lower your costs to only 1.04%. Summit clients save approximately 60%– after Summit’s fee.
Why not ask Summit to perform a Free Market Investment Analysis? There are only two possible outcomes: first, everything you are doing is great—when would you want to know this? Second, what you are doing is costing you BIG—when would you want know that? This FMIA includes your portfolio’s efficiency, cost analysis, and overlap study.
http://www.MySummitWealth.com
About the Author
About Mitch Levin: Mitch Levin, MD, CWPPtm, CAPPtm, CEO & Managing Director of Summit Wealth – Florida Division, a Registered Investment Advisory firm. Summit Wealth is dedicated to “empowering investors to build, protect, and preserve their prosperity through their own Financial Fortress.” He is an “A” rated Florida State Representative of the Asset Protection Society (www.apsociety.org), and is a member of the Wealth Preservation Institute (www.thewpi.org), the National Association of Professional College Advisors (www.napca.org) as well as the National Association of College Financial Advisors (www.nacfa.com), and the Financial Planning Association (www.fpa.org.) Author, speaker, trusted advisor: Dr. Mitch is the co-author on many articles, and several other books (The Lies My Broker Taught Me; and 101 Truths about Money and Investing; and Secrets if a Worry Free Retirement), and has been featured in several educational CD’s (The Seven Deadly Investor Traps, How the Really Smart Money Invests), and in the acclaimed documentary movie “Navigating the Fog of Investing” along side several Nobel Prize Laureates. He has appeared on ABC, NBC, and in USA Today. In addition, Mitch is certified in Florida to provide Continuing Professional Education credits to Certified Public Accountants. Some of his speaking engagements include, “The Myths of Investing,” “College Funding Solutions,” “This Time is (Never) Different,” “The Affluent Survival Guide,” “Why Mutual Funds Stink,” “Why Your Insurance Agent is Costing You Tens or Hundreds of Thousands of Dollars,” “How to Prosper in the Reign of Error,” and “Your Asset Protection is Inadequate.” His clients are nice, affluent people, who actually may be furious when they discover -- too late -- the poor outcomes, outrageous and hidden fees, and unnecessary taxes they have to pay. And the excessive risks they’re taking—that’s another conversation completely. They’re bombarded with mixed, or negative, or outright fear-mongering messages. They sometimes wake up in the middle of the night in a cold sweat. These people feel cheated Some are worried sick about the markets ups and downs… and their futures don’t look so rosy anymore. How to pay for college, retirement, eliminate their mortgage burden. They’re looking for new ideas and don’t know who to turn to. Still others are honest enough to admit they’re failing miserably in their investments, trying to pick stocks, or time the markets, or chase mutual fund track records. They would stop, but no one has the guts to provide a viable alternative, to tell them the truth, to tell them they’re wasting time while losing lots of money. They’d have a better chance at the roulette wheel, without the fun. Mitch and Summit Wealth’s mission is to “Improve the world, one investor at a time. Empowering investors to achieve Full Financial Health.” Summit Wealth delivers: Solid Growth. Safely Managed. Trusted Advice. Creating a Better Future. They help stop the financial malpractice and facilitate the cure for financial cancer. To progress from scarcity, losses, fear, and frustration to abundance and peace of mind, he provides a completely independent financial second opinion. While in medical school, Mitch was instrumental in setting up the first (and completely student financed) long-term endowment campaign through insurance and derivative products. He was recruited by then Orlando Regional Medical Center to open the first full time eye surgery practice at one of its facilities. The practices grew to several locations with dozens of employees, including several now prominent surgeons. He has lived with his family in Central Florida since 1986, and has been involved professionally in the financial world since 2005. A small business owner, Mitch has built, grown, bought and sold several other business entities. In addition, he is a successful commercial real estate investor. Dr. Mitch is a major donor to charitable organizations, and has served as an officer on several Boards of Trustees. The knowledge he gained through these experiences contributed to his personal financial success and the ability to pursue his passion of educating and assisting others in their quest for financial freedom. Contact: Mitch Levin at Summit Wealth – 866.977.2252 For more information about Mitch Levin please visit http://www.mysummitwealth.com
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