Impact of Fees

The first step to improving your return is cutting your Mutual Fund expenses....

Do you ever wonder why your broker encourages you to invest for the long haul? The longer you invest in high-fee funds, the more their brokers make. That’s money that comes directly OUT of your pocket and INTO theirs!

A difference of a few percentage points doesn’t look like much at first, but for even modest investors, excessive fees will add up to tens of thousands of dollars that might buy you a retirement home or the trip of a lifetime.

Just how much does a fund company make from investors who hang in there for the long term and pay the excessively high rates that many funds consider ordinary overhead? John Bogle, the founder of the very successful Vanguard Group, sheds some light on that, and when the light comes on, it’s an ugly sight. When asked by a “Frontline” interviewer, Bogle offered this illustration: "An individual who's 20-years old today [is] starting to accumulate for retirement.... That person has about 45 years to go before retirement -- 20 to 65 -- and then another 20 years to go before death mercifully brings his or her life to a close. So that's 65 years of investing. If you invest $1,000 at the beginning of that time and earn 8 percent, that $1,000 will grow ... to around $140,000."

He continued: "Now the financial system -- the mutual-fund system, in this case -- will take about 2.5 percentage points out of that return, so you'll have a net return of 5.5 percent, and your $1,000 will grow to approximately $30,000 to you the investor. Think about that. That means the financial system put up zero percent of the capital and took zero percent of the risk and got almost 80 percent of the return! And you, the investor, put up 100 percent of the capital, took 100 percent of the risk, and got only a little bit over 20 percent of the return. That's a financial system that's failing investors because of those costs of financial advice and brokerage, some hidden, some out in plain sight that investors face today. The system HAS to be fixed," Bogle insists.

Making the most with your money (and your time)

You can fix this system for yourself a lot more simply than you might imagine.

The first step toward putting that money back in your own pocket is to understand the fees you’re paying. Usually, low-fee funds advertise the fact. You should be able to determine the management fee in less than two minutes looking at their website. For example, try www.fidelity.com, or www.vanguard.com, our two favorite fund providers.

Click on the fund and then click “fees and expenses.” It is all right there. The reason is that their average fee of .40% at Vanguard and .65% at Fidelity is less than 1/3 the cost of their competitors. That is money that stays in your pocket! The average mutual fund expense according to Lipper is 1.7% and it can go as high as 2.5%, especially with sales charges and mortality charges( a favorite hidden charge of insurance companies).

If you can’t figure out the fee, it’s because it’s hidden deep in a prospectus. That’s never a good sign. Obscure payments like “wrap fees,” “12b-1 fees,” “front end loads,” “mortality charges,” and “back end loads” are all subtracted from your return, meaning that broker’s hand is in your pocket taking money you should be getting for yourself. Instead, your investment is going to the mutual fund company, the insurance company, or their representatives.

Our first recommendation: Look closely at companies like Fidelity Investments, Vanguard, and TIAA-Cref that offer low fee funds that can slash 90% from your management fee expenses. Over a lifetime of investment, that’s tens of thousands of dollars in your pocket rather than your broker’s!