Are Your Mutual Funds Worth the Expense?

One recent analysis saved a widow about $24,000 per year in hidden mutual funds fees that were delivering below par results.

That was the result of our fee savings analysis based on a $1.9 million dollar portfolio. We did this review for a widow that kept her money at mammoth investment company thinking that must be a good place for her life savings. Inefficient tax planning and a poorly aligned portfolio were the less obvious issues for this seemingly unattended portfolio.

Higher fees are not necessarily a bad thing. Many outstanding professionals charge higher fees for their service (doctors, lawyers, financial planners, investment money mangers and accountants) and are often well worth every penny we pay them.

But the extra expense is not always worth the money.

In the investment world we have choices between active investments (those with a captain at the wheel) and passive (computer driven) portfolios. There are strong arguments to be made for either side. In a bull market (like we’ve had for the past decade) the expense headwind has made it more difficult for active managers to keep up with the computer models since they need to overcome their additional fee as the markets have risen. Often times active managers shine in more turbulent or down markets which are coming. We don’t know when or why that next period will occur.

For my client portfolio’s we own both. We’ve done our due diligence and have selected active managers that have out performed their passive competitors over a long period of time. Active managers we choose fit a prudent niche we want to include in client portfolios. We’ve always been very proud of our low-cost, prudent investment style.

Some of our client’s have portfolio’s made up off 100% Exchange Traded Funds that are passively managed. This is the low-cost investment fee way to go.

Since both styles have proven to work well we own both active and passive managed funds for some client portfolios. That flexibility is one of the best advantages of being independent and not beholden to what an employer might make their advisor/employee choose for their clients.

5 Powerful Reasons to Invest in ETF’s

For the recent portfolio we reviewed, that was not the case. The investment management performance was underwhelming and the fees we could save them by moving to a passively managed portfolio were over 1% per year. One percent times $1.9 million is $19,000 per year! We also charge a firm management and financial planning fee that was 1/4% of a percent per year lower which almost another $5,000.

How do investment management fees work?

They are netted from your investment returns BEFORE they get to you. For example, if your favorite mutual fund showed a gain of 9% in 2017, it actually earned 9% + whatever the hidden (it’s spelled out in prospectus) management fees was for the year. So if the management fee was 1.2%, then it actually earned 10.2% and you made 9%.

All you care about is the net return. There are index funds and ETF’s that will charge significantly lower fees. Comparing the long-term returns and management style, portfolio and techniques of the investments will help decide on the better choice. There is MUCH MORE to choosing specific investments for a prudently diversified portfolio than fees.

My focus here was fees. In the case above, the poor widow also paid an additional front-end fee to purchase her mutual funds and several extra large expenses in annuities she was sold. Ouch!