Most of what passes as investing can be confusing and complicated. It shouldn’t be. There are certainly some aspects of creating a financial plan, understanding risk, and portfolio building that can overwhelm most investors. Yet, there is one very simple way to improve the return on your investments; pay less. Let’s assume two identical, well diversified equity mutual funds. Fund A is a true no-load fund with annual expenses of 0.75% per year (higher than the funds we use, but we are going for more typical investments). Fund A rarely buys or sells securities (low turnover), so its internal trading costs are about 0.25% annually.
On the other hand, Fund B is sold by brokers and charges a 5% front-end commission. Sporting more aggressive active portfolio management, they charge 1.25% per year (the average equity fund charges more than 1.4% per year). Plus the fund trades often incurring additional 0.75% in annual (and never disclosed) trading expenses.
Both funds 30-year average annual gross returns, before expenses, were 9%. We are going to assume an initial investment of $100,000. Let’s see how much an investor in these two imaginary, identical funds (with the exception of the fees charged) would have had after 3 decades.
After taking a little off the top (5%) to pay the broker, trimming away an almost imperceptible extra management fee (0.5%), and making more trades and paying more commissions, the investor in Fund B ended up almost a third of a million dollars poorer than the Fund A investor. You will be hard pressed to find any money manager who added enough return to compensate for that major difference over a three decade period.
It’s a very simple concept; pay less, make more. Fees really do matter. They are also the easiest part of your portfolio to control.
It is easy to avoid loaded mutual funds, high expenses, and usurious 12b-1 fees. Just read a small portion of the fund’s prospectus (the fee part). You should NEVER pay a front end load, 12b-1 (a sneaky marketing fee) or deferred load. Those who use non-managed index or passive funds can avoid the cost of expensive managers and research departments (which have been consistently shown to add little or no value over long time frames).
Those investors who hire a professional to manage their money should also be extremely sensitive to fees. Yes, it often pays to hire an investment advisor. Yet, the fees they charge could offset any gains provided by their portfolio creation skills and the disciplined approach they should provide.
Knowing what a registered investment advisor, like Vestory, really charges these days is easier than it has ever been. Just get online and go to www.adviserinfo.sec.gov. Here you can search for any investment advisor by name or even a portion of their name, using the “Investment Adviser Search” link in the left column. Once you have identified the advisory firm (just click on the appropriate name on the next page), scroll down the left column to the link “Part 2 Brochures.” That will download a new PDF file that must show (usually on pages 5-12) the actual fees charged to clients by the advisor.
Certainly, you can’t expect investment advice that is free. However, you do need to be aware of the fees charged and seek out the best advice possible at the most reasonable cost.
Most brokers, agents, and advisors hate discussing (or even disclosing) fees. If they could, the majority would prefer you not know how much is being charged for financial services. The Securities & Exchange Commission requires the disclosure of fees in a variety of written forms, but it is up to you to actually read them.
Mutual funds disclose fees through a prospectus. Insurance agents bury them in complex policy statements. Registered investment advisors (RIAs) must provide a disclosure called a “form ADV” along with a more understandable “ADV Part 2 brochure.”
To help you understand how high these fees can be, we examined the “Part 2 Brochures” of a few of the more popular advisors who use broadcast media (as we do) to gain clients. We are not commenting, in any way, on the quality of the advice provided by these firms. We are merely sharing publicly available information to help investors make informed decisions.
In several markets, Gary Kaltbaum offers investment advice and steers listeners to his investment management services through Kaltbaum Capital Management. Looking through that ADV Part 2 you will find:
“Asset based management fees range up to 2.00% of assets placed under management. The amount of the fee is negotiated on a case-by-case basis, and is determined based upon a number of factors including but not limited to the amount of work involved, the assets placed under management and the attention needed to manage the account. These fees are for advisory services only and do not include any applicable transaction fees, taxes or commissions (please refer to Brokerage Practices).”
Up to 2% plus commissions and other fees? He will have to make a lot of extra money, over and above what the market itself returns to make up for that capital drain.
There is another program that airs in several cities, Market Wrap with Moe Ansari. How does Moe’s Compak Asset Management charge? Take a look:
Please note that those charges are quarterly. That makes the maximum charge 2% per year, unless you have less than $150,000. In that case, the fee rises to 2.5% per year.
Oh, and don’t forget to mention possible commissions and “trailers” (ongoing fees paid by some mutual funds and insurance companies):
“Some investment advisor representatives (“IARs”) of Compak Asset Management while acting as a Registered Representative of our affiliated broker‐dealer (Compak Securities, Inc.) may receive trailing 12b‐1 distribution fees and other sales commissions from investment companies, insurance companies, and product sponsors in connection with the placement of your funds in certain securities including variable annuities.”
Best selling author, radio and TV host (he is even appearing on PBS stations now) and highly acclaimed investment advisor, Ric Edelman, through his investment firm, Edelman Financial Services charges a maximum of 2% per year for advisory services for the firm’s wrap account “EMAP.” Then there is the ubiquitous “red flag” paragraph that so many advisors bury:
“EFS Advisors are also SMH registered representatives and receive commissions and other transaction-related fees on products sold outside of EMAP as part of an implemented financial plan. Lower fees for financial planning and securities transactions may be available from other sources. EFS Advisors may have a financial incentive to recommend products which may result in commission revenue.”
Ray Lucia touts his simple “Buckets of Money” approach to investing on his national show. Here is a sample of the fee disclosure for one type of account, the RJL Wealth Management Program” at the firm to whom Ray often refers listeners:
“The maximum fee charged for Accounts that maintain equity stock as Program assets shall not exceed 2.9% annually or 2.65% annually for Accounts that maintain only mutual fund Program assets.”
But that may not be all:
“Other costs that may be assessed to a client include fees for portfolio transactions executed away from Fidelity, IRA and qualified retirement plan charges, dealer mark-ups, electronic fund and wire transfer fees, market maker spreads, exchange fees and broker/dealer fees, among others. Mutual funds, exchange traded funds (“ETFs”), and alternative investments may charge their own fees (such as 12b-1 fees and surrender charges) for investing the pool of assets in the respective investment vehicle.”
It’s hard to see how an investor could end up with any “wealth” after all of that.
Then there is Adam Bold with his national radio show and nationally franchised “Mutual Fund Store” concept. Since each Mutual Fund Store is an independent franchise, I chose one at random to use as an illustration. While far more reasonable than those previously mentioned, take a look at the fees charged by this one franchisee with “stores” in Colorado and Kansas:
Finally, to be fair, let’s compare all of these to one other radio show that is affiliated with a registered investment advisor, Investoradio and our firm Vestory:
Pretty simple and far lower than any of our broadcasting peers (that we can find). What about that extra “red flag” paragraph. Our version is as follows:
“The Vestory fee is non‐negotiated. It is separate and distinct from expenses charged by mutual fund companies, which are described in each fund’s prospectus and generally include an internal management fee and other fund expenses. A client could invest in these products directly, without the services of Vestory. In that case, the client would not receive the services provided by Vestory which are designed, among other things, to assist the client in determining which products or services are most appropriate to each client’s financial condition and investing objectives.
Clients are also responsible for custodial fees and security transaction fees charged by the independent custodian and executing broker‐dealer. These are also separate and distinct from Vestory’s advisory fee. Vestory does not receive any portion of these third‐party charges. Nor does Vestory accept any commissions for the sale of securities or other investment products, including asset‐based distribution fees from the sale of mutual funds.
The client is encouraged to review third‐party fees, mutual fund fees and the fee charged by Vestory to fully understand total fees to be paid.”
Notice, no 12b-1 fees, no commissions or transaction fees coming our way (clients pay a small transaction fee to Schwab, of which we receive nothing), and there is no conflict of interest statement.
Let’s assume that, over time, the market is efficient (which we believe to be true based on voluminous academic research) and no advisor, no matter how potentially talented, can add much if any additional long-term returns, who would you rather have manage your portfolio? Is it likely that paying an additional 0.70% to 1.7% per year (plus possibly higher fees for the underlying investments) will leave you with more money 10, 20, or 30 years from now? These are possibly the most important (and yet surprisingly simple) questions you must answer before entrusting you money to anyone.