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Mutual Fund Expense Ratios

Pay Attention to Expenses!

A Brief Explanation of Fees for Mutual Funds

One of the reasons Cornerstone Investment Management and Consulting was founded was to make the costs in the investments industry clear. Often, investment products are sold, not bought. The simple fact is that companies charge exorbitant fees for some of their services because they can. Investors have not been educated as to the true cost of their investments. A 1% difference in investment return annualized over your lifetime can be the difference between a comfortable retirement and a worrisome one!

Mutual funds are the most widely held investments in our country, and there are five potential charges associated with these investments. It is important that you understand these expenses and how they can affect the value of your account over time.

1. Front end loads: when a stockbroker sells you a fund, you are often charged a commission on that transaction; these frequently range from 5% to 5.75% of assets invested with some discounts provided for higher investment amounts.

2. Back end loads: as an alternative to front end loads, commissions can also be charged when you sell a fund; back end loads typically start at 5% and decline by 1% each year after the second year that you have owned the fund (again, based on your assets in the fund). However, if this sounds like a great way to avoid paying up front, you might be surprised to know that total expenses are frequently higher on these funds, so you will actually pay more over time.

3. Marketing fees: many mutual funds also have marketing fees you pay known as 12b-1 fees. This expense is assessed annually and provides the fund income for marketing and distribution. Often, a percent of this fee is provided to the broker who sold you the fund.

4. Management fee: this is the cost of the actual management of the assets on a day-by-day basis. For many actively managed equity mutual funds these charges range between 1-1.5% annually.

5. Trading costs: investors are also charged for the trades conducted within the fund, the costs of which are very difficult to monitor. So, higher portfolio turnover likely means additional cost of investing.

When all of these expenses are taken together, the damage to your portfolio can be significant. To illustrate the point, we randomly selected a mutual fund with multiple classes of shares offered by a large brokerage house with fees that reasonably represent those charged across the industry. Let’s assume the initial investment in the fund is $10,000 and the return for the next fifteen years is equivalent to the return of the last fifteen (12.21% on average for the S&P 500). After fifteen years, the ending value and expenses are as follows:

Class A shares: Ending Value $44,474, total fees over the period $5,155.09
Front end load: 5.25% ($525 paid out before your money starts earning)
12b-1 fee: .25%
Total expense ratio: 1.29%

Class B shares: Ending Value $42,124, total fees $7,256.52
Back end load: 5% (not included because fund is assumed held for period)
12b-1 fee: 1%
Total expense ratio: 2.05%

Class C shares: Ending Value $42,852, total fees $6,905.06
Back end load: 1% (not included because fund is assumed held for period)
12b-1 fee: .25%
Expense ratio: 1.93%

There is a significant difference from among the returns for the same investment, and it is important that investors learn what to look for and the right questions to ask when selecting funds. It’s time to take that 1% back by asking the right questions when presented with an investment idea:

  • What are the total expenses associated with this investment? Specifically, what are the charges on my investment for the following:
    Front-end loads, back-end loads, 12b-1 fees, and management fees?
  • How are you compensated?
  • How do you analyze the mutual funds you offer?
  • How costly is it to get out of this investment?

Some helpful hints:

  • Avoid providers who do not answer these questions clearly and to your satisfaction.
  • Avoid anyone who tries to sell you class B shares of a mutual fund, especially if they tell you the funds are “no load.”
  • Avoid working with someone who only offers you investment options from the company that they are representing.

To determine the costs of your investments, you can use a couple of tools on the internet to determine the cost of your mutual funds. The resources to do so are:

1) Morningstar

Enter mutual fund ticker
Select “Expense” tab below the Fund name
Record the following:
Initial Sales fee __________
Deferred Sales fee __________
Total expense ratio __________

2) FINRA's Fund Analyzer (site recommended by the SEC).

Enter the following information after entering the fund's ticker and "Show Results" (if you do not know, enter a reasonable guess):

Number of years you will hold investment (example 10)
Dollar value of initial investment (example $10,000)
Expected rate of return (8 – 10% is conservative for stocks, 6 – 7% is conservative for bonds)

The final results will provide the value of the position at the end of the period as well as the total expenses you will pay under the scenario you have entered. You can compare expenses across funds and classes of funds as well as truly see the impact that expense ratios can have upon returns. If you have questions about your mutual fund expenses, please contact us and please consider Cornerstone your resource for unbiased market information.



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Cornerstone Investment Management and Consulting, LLC, 809-C Daphne Avenue, Suite 102, Daphne, Alabama 36526. Fee-based investment management, hourly financial advice and planning. Cornerstone is a Registered Investment Advisor (RIA) registered with the Alabama Securities Commission and is headquartered in the Eastern Shore of Mobile Bay in Daphne, Alabama. Cornerstone is also registered in Florida, Georgia, Louisiana and Texas and permitted to service other states by de minimus exemption.

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