Tuesday, November 30, 2010

Investment Fees Reexamined

More and more, it is becoming clear that fees are a large determinate of investment performance. In this month's issue of NAPFA Advisor, Vern Sumnicht, MBA, CFP, discussed a study by State Street Corp. and the Wharton School of Business that found just 43 percent of investors understand the fees associated with their investments even "fairly well." However, in a low-return environment, reducing costs becomes an increasingly critical way to improve investment returns for any portfolio.

The following is a portion of the study's findings:

"Typically, actively managed equity-based mutual funds without commissions (no-load) charge about 1 percent to 2 percent each year inside the fund, to manage and operate the fund. However, there are additional costs that are not typically considered in the cost equation. Transaction costs -- the costs to buy and sell stocks inside the fund -- can add another (undisclosed) 0.5 percent to 1.5 percent annually to an investor's cost to hold that mutual fund investment.

Additionally, when fund managers are faced with redemptions, they must sell securities from the fund's holdings to provide cash for the redemptions. When these securities are sold for a gain, the sale triggers a taxable event for the remaining investors holding the fund in non-qualified accounts, whether the investor has been a shareholder for 10 years or 10 days. Furthermore, many funds wait until late in December to make their capital gains distributions known, leaving little or no time for investors to make other decisions to offset the tax liability. These costs can add an additional 0.5 percent to 2 percent to the annual cost for investors."

Combining these fees, investing in a mutual fund can incur charges of between 2 percent and 5.5 percent -- obviously significant. Keep in mind, this study doesn't even account for any additional fees charged by a financial advisor for monitoring your account. This illustrates the importance of keeping a close eye on fees when analyzing potential investments.

Finally, the study affirms my belief that the advisors of Net Worth Advisory Group really do add tremendous value to their clients retirement planning efforts. In most cases, we charge no more than 1.5 percent for our services. This is an all-inclusive fee, covering investment management, transaction fees, and meeting twice a year to review investment performance and update your financial plan. Further, we invest our client's funds into individual stocks as opposed to mutual funds, saving them fees and allowing more control over tax implications. Lastly, our advisors shake the hands of our clients, develop personal relationships, and provide individual-specific advice -- something a mutual fund can never do.

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