coins-1015125_1920High fees are the silent killers of good investment results.  The arithmetic part of that statement is self-evident. What’s less clear is the ways in which savers are subjected to excessive costs in mutual funds.

Commissions are still a reality for customers of brokers, particularly in the case of older individuals who have been accustomed to that type of expense for years. Commissions on annuities and mutual funds often amount to 4% to 8% of the amount invested. That money can be recouped only if the fund a) is held long enough, and b) performs sufficiently well over time to overcome the advantage of a no load fund. For obvious reasons, financial advisors aren’t wild about no load funds, unless they also add their own layer of fees (more below).

If working with a broker who sells commissioned funds, we recommend the following: 1) hold your funds for many years to avoid paying a new loads; 2) insist on low annual cost funds, with expense ratios in the neighborhood of 0.60% per year or less; 3) invest in only 2 or 3 funds total to minimize complexity and take advantage of breakpoint commission pricing; and never, ever buy “B Share” or “C Share” class funds.

Since our beginning, Peloton has been compensated only by our clients’ management fees, a practice which aligns our interests with our clients’ interests. And although that feature used to be rare, today many firms adhere to the same “fee-only” compensation model. The virtue of the fee-only approach is depleted when advisors layer their fees on top of mutual fund fees, often times resulting in an all-in fee of 1.80% or higher every year. Many times, this absolute cost level means that paying front end loads and holding for a long time is actually a more effective investment strategy. Minimizing fees is one of the reasons Peloton uses individual securities. If your advisor uses this fee-on-fee model, we recommend that you pay a total, all-in fee rate of less than 1.20% annually.

***

Many individuals are unaware that they have choices about whether to have their own customized, fee-only managed portfolio, or to purchase mutual funds. However, even for those who are limited to funds, there are ways to maximize the value of using that type of investment product. We hope this series was helpful toward that end: helping you navigate the world of mutual funds to ensure that through reducing complexity, maintaining control, and minimizing costs, you can make investing work for your benefit.

 

Mutual Fund Investing: Introduction

Mutual Fund Investing: Complexity

Mutual Fund Investing: Control