Monday, March 1, 2010

The Hidden Costs of Mutual Funds

The Wall Street Journal had a great article detailing how expensive it truly is to own a mutual fund. Of course, the average investor knows that when investing in a mutual fund, they will need to pay an expense ratio to compensate the portfolio manager and cover operating expenses. Currently, the average expense ratio of a U.S. stock fund is 1.31%.

However, that's not the true bottom line. There are costs not reflected in the expense ratio related to the buying and selling of securities, and those expenses can make a fund two or three times as costly as advertised.

Unfortunately, the average investor has no idea what these additional costs amount to due to a lack of information. These trading costs aren't even disclosed in a fund's prospectus.

A study conducted last year of thousands of U.S. stock funds concluded the average trading costs amounted to 1.44% of asset. Again, that average trading expense of 1.44% is in addition to the average expense ratio of 1.31%, bringing the average cost of investing in a mutual fund to 2.75%. This means the fund would need to achieve a return of 2.75% just to break even. The study even concluded that it wasn't uncommon for a mutual fund's trading expense to exceed 3%, which when added to the average expense ratio brings the cost of these funds to over 4%!

The "Best Stocks, Best Funds" Advantage

At Net Worth Advisory Group, we commonly utilize a strategy we call "Best Stocks, Best Funds." With this strategy, we essentially build custom mutual funds for our clients. We utilize a service called FolioFN ( which enables us to conduct unlimited trading for just .25% of the invested assets. With the ability to conduct unlimited trading, we are able to offer our investment services to clients for an all-inclusive fee that rarely exceeds 1.5%, and can be as low as 1% (depending on the amount of assets invested).

Think about this. A 1.5% all-inclusive fee buys you a professionally managed portfolio, custom built for your needs. The same fee gets you a full-time financial planner who is in your corner, who meets with you at least twice a year and is available at all times to answer any questions you have and assist with any issues that come up. That same fee gets you a comprehensive financial plan consisting of retirement planning, an insurance analysis, education funding information, estate planning, and more, and that plan is updated twice a year. What is better spent: the 1.5% that buys you all this, or the 2.75% fee charged by a mutual fund who doesn't know your name or the first thing about your financial situation, can never shake your hand, and certainly won't be available to answer your questions or ensure you are on pace to meet your retirement goals.

Clearly, Net Worth Advisory Group provides superior service when compared to a mutual fund. When you conclude that working with Net Worth can cut your financial planning expense nearly in half, why not give us a shot? Call to schedule a complimentary consultation.

This article was written by Lon Jefferies of Net Worth Advisory Group. Learn more about Net Worth Advisory Group at or visit Lon's blog at

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