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Could someone help explain these Mutual Fund expenses?
Old 01-24-2008, 09:05 PM   #1
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Could someone help explain these Mutual Fund expenses?

Here is copy straight from morningstar snapshot of a mutual fund.
Could someone explain the expense ratio as shown below?
Are 12b-1 fees normal or unusual?
What is considered a high 12b-1 fee? I have read where anything above .25 is considered a "load fund".
Why are there two different expense ratios shown and which one would be the one used to charge the fund?

Actual Fees %
12b-1 0.25
Management 0.78
Net Expense Ratio: Annual Report 1.27
Net Expense Ratio: Prospectus 1.35
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Old 01-24-2008, 09:15 PM   #2
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12B-1 Fees financial definition of 12B-1 Fees. 12B-1 Fees finance term by the Free Online Dictionary.
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Old 01-24-2008, 09:21 PM   #3
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Thanks joesxm.
That's where I read about the .25 value for 12b-1 fees.
It seems to me that 12b-1 fees are not the norm with Mutual Funds.
Would that be a correct assumption?
Why the two different expense ratios stated?
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Old 01-24-2008, 10:24 PM   #4
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None of my funds have a 12b-1 fee. I think you are better without them.

Sometimes the funds voluntarily reduce the management fee for a time period for marketing purposes. I think that they may also calculate them exactly at the end of the year (i.e. annual report). It may be that the prospectus states the maximum or estimated fee, and the annual report shows the actual fee for the prior year.
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Old 01-24-2008, 10:39 PM   #5
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That is an expensive fund. Compare Fidelity Spartan or Vanguard MF's for low cost MF's. If at all possible avoid anything with a load or 12b-1 fees.

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Old 01-24-2008, 11:56 PM   #6
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The only thing that is missing is trading costs, which a mutual fund is not required to publish. Many times it's a good idea to find a fund with low turnover, because the costs to buy and sell holdings will be much lower. Better yet, why not consider index funds as they have close to no turnover and typically have expense ratios of around 0.20% ?
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Old 01-25-2008, 10:43 AM   #7
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Quote:
Originally Posted by dessert View Post
Thanks joesxm.
That's where I read about the .25 value for 12b-1 fees.
It seems to me that 12b-1 fees are not the norm with Mutual Funds.
Would that be a correct assumption?
Why the two different expense ratios stated?
12b-1 fees of .25 are very common, most mutual fund families now limit them to that amount, meaning they were higher in the past.

If the prospectus says the higher number, it means that fund management has decided to reduce the expense due to a large inflow of cash or another reason.

Outside of direct companies like Vanguard, T Row Price, and others, 12b-1's are quite common.

FINRA and the SEC are looking at eliminating 12b-1's for all mutual funds, but don't hold your breath.
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Old 01-25-2008, 01:48 PM   #8
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12b-1 fees are (supposed to be) taking YOUR money to advertise the fund to attract other investors so the management fee can come down due to a larger sized fund....

OR.... just to make more money


Usually they go to the financial advisor that had you put your money in the fund.... a nice chuck of change if they get a lot of people..
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Old 01-25-2008, 03:08 PM   #9
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12b-1 fees are (supposed to be) taking YOUR money to advertise the fund to attract other investors so the management fee can come down due to a larger sized fund....

OR.... just to make more money


Usually they go to the financial advisor that had you put your money in the fund.... a nice chuck of change if they get a lot of people..
Well 12b-1 fees were SUPPOSED to either go down or be eliminated as the funds got bigger, but they haven't really.

On established funds today, it is a way to make money.

The advisor gets 25bp a year on the fund, or $2.50 on every $1000 you have invested in it, or $50 a year on a $20,000 account. You need a LOT of folks to make that number work..............
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Old 01-26-2008, 07:35 PM   #10
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Thanks for the information guys and/or gals. I was looking around at different funds and found one with 12b-1 fees listed at .75% and ER at 1.50.
I'm used to looking at MF without 12b-1 fees so I was just trying to get a feel for why they were there. We learn a lot on this site.
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Old 01-26-2008, 08:50 PM   #11
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Thanks for the information guys and/or gals. I was looking around at different funds and found one with 12b-1 fees listed at .75% and ER at 1.50.
I'm used to looking at MF without 12b-1 fees so I was just trying to get a feel for why they were there. We learn a lot on this site.

Hopefully you are not invested in that one.... it is ripping off their investors big time!!!
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Old 01-26-2008, 09:02 PM   #12
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Also per some authors, there is roughly an additional 50% (of the published expense ratio, so about another 0.75%) of hidden expenses that include things like the mutual fund's trading costs. If you like getting the dirt on the financial industry, try the latest Ric Edelman book ("Lies about Money") or Mike Edesses's "The Big Investment Lie" .


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Old 05-05-2008, 08:38 PM   #13
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Also per some authors, there is roughly an additional 50% (of the published expense ratio, so about another 0.75%) of hidden expenses that include things like the mutual fund's trading costs.

Someone else just mentioned this to me today - that aside from the expense ratio, there are other "hidden fees." What's the deal? Is there any way to know what you're really paying?

The guy I was talking to was trying to make the case that even though index funds appear cheaper, these "hidden fees" make them nearly comparable to (relatively cheap) managed funds.
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Old 05-05-2008, 09:01 PM   #14
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The guy I was talking to was trying to make the case that even though index funds appear cheaper, these "hidden fees" make them nearly comparable to (relatively cheap) managed funds.
It is possible to find index funds that have expenses higher than some of the very inexpensive managed funds, but these index funds are rare (and an unconscionable ripoff). Investing with Vanguard or Fidelity will help an average investor avoid the biggest pirates.
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Old 05-05-2008, 09:54 PM   #15
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It is possible to find index funds that have expenses higher than some of the very inexpensive managed funds, but these index funds are rare (and an unconscionable ripoff). Investing with Vanguard or Fidelity will help an average investor avoid the biggest pirates.
The "hidden fees" are generated when they trade stuff, right? So a 500 index shouldn't have much of this at all? I saw a reference in another thread to this being more common in very narrowly focused index funds.
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Old 05-05-2008, 10:24 PM   #16
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Hidden fees: There's no precise definition of what is included in this term. Obviously, it includes fees that are not disclosed in the fund prospectus. For example, the fees charged by some brokers to put a client into a fund is sometimes termed a "hidden fee" because it isn't in the fund prospectus. (sometimes called "alphabet fees" becasue the share types are often known as "A-shares", B-shares" etc, each type with a separate commission schedule). The costs you pay for turnover within the fund are of two major types: trading costs and taxes. The trading costs are what the fund management pays to the big brokerage houses to buy and sell the stocks within the fund) also come out of the fund, but aren't part of the stated expense ratio. Tax costs are incurred by the investor when a fund realizes capital gains as a result of selling stocks within the fund. These are not normally thought of as "hidden fees" (because they aren't charged by the fund company to investors) but they are surely a cost that investors should know and consider. Some funds (usually identified as "tax managed" funds) take special pains to reduce these tax costs.

Yes, narrowly-focussed index funds might be expected to have higher hidden fees and tax costs due to more frequent trading.

The take away: Buy index or low-cost managed funds directly from the mutual fund company and you'll significantly reduce the burden of these fees and costs. Costs matter a lot.
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Old 05-06-2008, 02:21 AM   #17
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The fees on mutual funds is very confusing.

I never look at anything but the total fee charged.

Mutual funds have a fee listed in the prospectus. But they can waive part of the fee from year to year. Some do that for various reasons.

I am not sure about the situation that you listed.

Fees... That is what I like about VG... the fee is typically low.
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Old 05-06-2008, 09:37 AM   #18
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It is possible to find index funds that have expenses higher than some of the very inexpensive managed funds, but these index funds are rare (and an unconscionable ripoff). Investing with Vanguard or Fidelity will help an average investor avoid the biggest pirates.
Sorry, but this theory just drives me out of my gourd! First off, an index fund is the only GUARANTEED to underperform its index.
Now, as to fees, you should compare not only 12b-1's, but also, management fees and most importantly total returns. There are fund families out there that trade heavily and therefore incur quite a few expenses, and some that trade very little. But most importantly should be results.
Would you rather pay 5% for a 20% return, or 2% for a 10% return? Personally, I look much more closely at 5, 10, and 20 year return averages, than I do the expense ratio. But then, I'm an investor, not an accountant.
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Old 05-06-2008, 09:50 AM   #19
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My new favorite hidden "fee" is when mutual funds or ETFs lend securities to short sellers then keep the fee charged to the short seller instead of returning it to the shareholder. This is not part of the ER and I don't believe that the amount the manager earns doing this is a required disclosure.
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Old 05-06-2008, 09:56 AM   #20
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Hidden fees: There's no precise definition of what is included in this term. Obviously, it includes fees that are not disclosed in the fund prospectus. For example, the fees charged by some brokers to put a client into a fund is sometimes termed a "hidden fee" because it isn't in the fund prospectus. (sometimes called "alphabet fees" becasue the share types are often known as "A-shares", B-shares" etc, each type with a separate commission schedule). The costs you pay for turnover within the fund are of two major types: trading costs and taxes. The trading costs are what the fund management pays to the big brokerage houses to buy and sell the stocks within the fund) also come out of the fund, but aren't part of the stated expense ratio. Tax costs are incurred by the investor when a fund realizes capital gains as a result of selling stocks within the fund. These are not normally thought of as "hidden fees" (because they aren't charged by the fund company to investors) but they are surely a cost that investors should know and consider. Some funds (usually identified as "tax managed" funds) take special pains to reduce these tax costs.
THANK YOU, this is very clear and exactly the kind of explanation I was looking for. I love this board!
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