My Mutual Fund Investments Are Free

Nothing is free when it comes to mutual  funds

 

Not long ago, a new potential client said to me, “My mutual fund investments are FREE, there is no fee.”

This was in response to me inquiring about what she was paying for investment management. Patiently, I affirmed her comment and said, “if you have selected properly, yes you may have invested in a no-fee mutual fund, but there is always a cost even with “no-fee” funds.”

I could tell from her facial expression that there was a bit of disbelief and asked if she was interested in me sharing some “insider” insight. She said, “Of course, I want to be informed.”

I spent the next few minutes sharing some of Wall Street’s “dirty secrets” about fees and charges to investors with IRAs, 401(K)s, and regular investment accounts. I commented that I don’t know anyone who works for free on Wall Street. Typically, there is at least one expense that every mutual fund passes on to its investors and that is the operating expense.

The operating expense is the cost to run the mutual fund and includes salaries, administrative costs, and advisory fees to the fund manager. This operating expense then gets divvied up among all the fund investors who impacts overall return. This fee varies widely depending on the fund but typically is less than 2%.

The fee impact is somewhat hidden as most investors rarely read the fund prospectus and see only the Net Asset Value (NAV) on their monthly statement. The reality is that this fee, which can be substantial, is deducted before an investor ever sees it in the form of their NAV. Take for example a popular fund, the Fidelity 500 Index Fund. A quick internet search shows they have $153.4 Billion in assets and the expense ratio is .015%. This means that $23 Million, yes $23 Million in fees (EVERY year) are taken out from the fund, i.e., investors’ pockets to “operate” the fund.

Are you getting full value for your investment dollars? Do the research yourself or call our office and we’ll provide a complimentary “second opinion.”

Darryl Franklin, Ph.D. helps his clients not only dream big, but bring those dreams to reality as a financial planner, portfolio manager, and coach.