What does it really cost to buy a mutual fund?
Almost every retirement portfolio includes some mutual funds. But you may be surprised at the costs you don't even know you are paying to own these products.
For many families, investments were put in place a long time ago and you may not have looked at them in years. Like your home owners insurance and your physical health, it pays to have a periodic checkup on your retirement account to be sure you are healthy.
One common ingredient in many investment accounts is mutual funds. Once, mutual funds presented an innovation. They were the first opportunity for many investors to own a basket of stocks that were professionally selected and professionally managed to achieve a specific investment goal.
But, today we are very sensitive to investment costs and the structure of some mutual funds creates hidden charges and fees that you may not even know exist. And over time, those costs can significantly reduce your investment performance.
Do any of these sound familiar:
- share-holder servicing fee,
- account manager fee,
- revenue-sharing fee,
- contingent deferred sales charge,
- 12b1 fee, or
- Sales Load?
All of these fees are charged against the value of the fund, and reduce its performance. But, who gets the money if the mutual fund share holder does not? It depends.
- Some of these fees go to the investment management company that selects and manages the investments.
- Some of the fees go to mutual fund distributors who promote funds to advisors.
- Some goes to brokerage firms who sell the funds to investors.
How much does all this add up to? It depends. Forbes magazine estimated the total cost of owning a mutual fund to be over 4% per year in an article, "The Real Cost of Owning a Mutual Fund."
So what can you do about it?
The best place to start is to visit with an independent, fee-only, fiduciary financial planner. Bring a recent statement and talk about how you could reduce your investment costs. As a fiduciary advisor, she/he is obligated to put your interests first and a big part of that is reducing investing costs.
Typically, exchange traded index funds are a good way to own a big basket of common stocks at a low cost. For example, Vanguard Total Stock Market ETF (VTI) has an expense ratio of 0.05% per year. But not all exchange traded funds are low cost, so always look carefully.
Your investment goals and current situation might call for additional priorities in addition to low cost. This is another area where good advice from an independent professional can be very valuable.
If this article has you thinking about your investment account, contact my office about a visit. I love to review statements and find ways to save clients' money. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.