Fees Matter …. A Lot!

TRUE FACT

You could have paid over $600,000 in fund management fees (1.3%) and financial advisor fees (1.00%) had you invested $100,000 in 1974 incorrectly.

25yrfees

Explanation

1.3% is the average mutual fund management fee, it is built into the “price” of the fund. You don’t pay it explicitly.

1% is the minimum fee financial advisor’s fee. It is a percentage of your “assets under management”. You pay it explicitly out of your pocket.

THUS…
If, in 1974 you had invested $100,000 in an index fund that tracked the Dow Jones Average, you would have had $1,655,074 in 1998.

If, in 1974 you had invested $100,000 in a mutual fund that tracked the Dow Jones Average AND had a fund management fee of 1.3%  you would have had $1,352,599  ( $302,474 less ) in 1998.

If, in 1974 you had invested $100,000 in a mutual fund that tracked the Dow Jones Average AND had a fund management fee of 1.3% AND had an advisor fee of 1% of Assets Under Management,  you would have had $1,048,587 ( $606,487 less ) in 1998.

Don’t believe it? Click HERE to see year-by-year detail of the summary show above.

It costs money to invest. How much it costs YOU to invest depends on choices you make.

Unavoidable Fees

Order Execution

The charge for submitting your order to the stock market for execution. The money goes to the broker that submits your order to the stock exchanges.

Management

The percentage of the fund’s net assets retained by the fund managers for providing the service of maintaining the fund. These fees range from .005% to over 3% for some specialty funds. This fee is embedded in the market price of the fund. You do not pay it separately.

For a fund that starts with $100,000, the difference between a 0.05% fee and a 1.3% fee can add up to to over $ 300,000 over a 25 year period . HERE’S PROOF!

Avoidable Fees

Never necessary to pay these fees; i.e don’t buy funds or use financial advisors that sell funds with these fees. These fees do not make the investment vehicle “better”. They merely transfer money from your pocket to someone elses pocket.

Front End Load

A commission paid right off the top of your “investment”; usually 4.5%. That means that for every $100 dollars you “invest”, $4.50 of it goes into your salesman’s pocket, only $95.50 goes into the fund you are buying. Funds that charge this fee are no better than funds that do not have a front end load; there is no “value added” because you are robbed of $4.50. Vendors of these funds count on your ignorance.

Advisor

A fee you pay someone to tell you what to do; usually  1.0 – 1.5% of your portfolio’s assets AKA “Assets Under Management”.  No need for an advisor if you are using the strategy taught to you by Investing For Retirement™

Annuity Management Fee

An annuity is an investment vehicle that guarantees you a fixed payout for life in return for a premium you pay. The amount of the fixed payout may depend on the value of stocks that you select to be your “payout” generator.  An extra fee is added to the required management fee to cover the expenses and risk of guaranteeing you a fixed payout for life. This fee is usually an extra 1.3% on top of the unavoidable management fee.

Using an annuity as your investment vehicle is very expensive. For a fund that starts with $100,000, the difference between a low cost index fund (0.17% fee)  and an annuity fund (1.3% management fee + 1.15 % annuity management fee; total fees = 2.45%) can add up to to over $ 600,000 over a 25 year period . HERE’S PROOF! (again, look at the period 1974-1998)

Distribution (12b-1)

A fee, 0.25 – 0.75% that you pay to help the seller advertise his product. REALLY!

When mutual funds first hit the market, they were a strange, unknown breed of investment. The Securities and Exchange Commission allowed the providers of mutual funds to charge an extra fee, referred to as the 12b-1, to help introduce the public to this new way of investing.

Funds that charge this fee are no better than funds that do not have a 12b-1 distribution fee; there is no “value added” because you are robbed of $4.50. Vendors of these funds count on your ignorance. Vendor who still charge this fee are beyond reprehensible; it represents a “spit in your face – boy are you stupid” – arrogance.

Short Term Redemption

A fee paid if you decide to sell the security before a certain time; usually one year.
Funds that charge this fee are no better than funds that do have a Short Term Redemption fee; there is no “value added” by a short term redemption fee.  Vendors of these funds count on your ignorance.

 Back End Load

Same as Front End Load only the dollars are taken away from you at the time you sell the security. Funds that charge this fee are no better than funds that do not have a Back End Load; there is no “value added” by a Back End Load fee.  Vendors of these funds count on your ignorance.

Transaction

A transaction fee is sometimes charged by a broker if you are purchasing securities through them that they do not ordinarily trade in. Fidelity may charge you $75.00 if you want to purchase certain Vanguard Funds through them.

What Are the Lowest Fees One Can Possibly Pay?

    If you follow the Investing For Retirement advice, you will pay an order execution fee of $3.50  to ShareBuilder ( why “Sharebuilder” is explained later) for each time you invest in Vanguard’s Total Market Index Fund (VTI).  Why VTI is explained later.

You will pay a management fee of 0.05% (that’s one twentieth  of one percent) to Vanguard for managing your VTI  fund!  This is the lowest fee being charged for any fund that we have seen.

Because you are investing in only one security, you will pay only one execution fee. If you were maintaining a diversified portfolio of say 5 securities, you would pay 5 x $3.50 or $17.50 each investment period. At $200 a month, that is 8.75% off the top of your investment!

That’s it. That is the lowest fees possible for participating in the stock market.

This Just In (5/25/2015)

This “fees” business has made it to the Supreme Court!

See What the Supreme Court’s fixes for retirement savings may do to your 401(k)

The case was instigated by current and former workers at Edison, a California-based utility, who claimed that the retail-class mutual funds selected as investment options by plan fiduciaries were imprudent because they charged higher fees than identical institutional-class funds available to larger investors.

Return To “IFR – The Strategy

 

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