True Cost of Mutual Fund

[kannon]

Morning All -

Had visit with Financial Planner other day - free seminar - I try to pick up information.

I am still leaning towards doing my own "active" management using what I have learned on here, including using low cost Vanguard funds.

In the seminar the planner mentioned that you can't just go by the prospectus expense ratio. You need to include also the other "hidden" fees - management, admin, ... His focus was when you include those fees they are not much different than his charge of 1.4%.

So my question is how do I compare apples to apples??

Do I include the expense ratio and other fees identified in the prospectus against his 1.4%? Does his 1.4% include all of the mutual funds fees or are they on top of them (i.e., 1.4% plus expense ratio + ...)?

For our FIRE we are looking to need about a net 4% long term growth on our investments. Having high expenses can really put strain on fund performance.

Thanks

Kannon

 

[travelover]

........His focus was when you include those fees they are not much different than his charge of 1.4%..............

I award three Pinocchios. Run.

 

[MRG]

You might point this wise advisor to the linked SEC document. They seem to believe it's all in the prospectus in two tables. Of course the SEC could be wrong and this wise advisor knows it all.:what:

http://www.sec.gov/answers/mffees.htm


What wouldn't be in there are advisor 'wrap' fees. Might ask if that's what he's talking about. Did he see a turnip truck when you pulled up?

Run away, far away.

Edit to add: Nice job smelling BS when a FA starts lying. You can also get the same definitions of allowable charges from FINRA or ICI.

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[zesty]

In the seminar the planner mentioned that you can't just go by the prospectus expense ratio. You need to include also the other "hidden" fees - management, admin, ... His focus was when you include those fees they are not much different than his charge of 1.4%.

That's bull. You can get a total US market index fund like Vanguard's VTSAX or Fidelity's FSTVX for .05%, or Schwab's SWTSX for .09%. That's $5 or $9 per year for every $10000 you have invested... instead of $140.

 

[Amethyst]

Anything that involves a human doing stuff just for you is always going to cost more.

Only, therefore, involve a human if you simply can't get the task done without a human's personal attention.

This would seem to be one of those times when you can dispense with the personal human touch (naturally, there are humans in the mutual fund company, but they are not paying personal attention to you).

Amethyst

 

[REWahoo]

This guy is either uneducated about mutual funds or lying to you.

 

[unclemick]

Turnover.

heh heh heh - it's not a trick question.

 

[Totoro]

A financial planner should bill for his time, not a %.

Otherwise, indeed run.

 

[Midpack]

Not surprisingly, your FP is using broad averages to make you think his fees are reasonable - it's sales spin and it works on too many people. There are indeed mutual funds that have fees that high or higher, with our without hidden fees (on top of expense ratios) - so he's rationalizing he's not lying to you outright. Or he's just ignorant and parroting his firms sales pitch. Either would be a good reason to eliminate his services from consideration IMO.

But there are lots of excellent mutual funds for almost any asset class with very competitive returns and far lower fees - Vanguard, Fidelity, Schwab, etc. You can easily find expense ratios for any mutual fund and while it takes some digging (unfortunately), you can also find any hidden fees on any mutual fund to get a clear picture of the total fees.

The odds that your FP can provide better returns after his fees than a portfolio of good low expense funds is very remote at best - there have been many academic studies to prove it.

 

[pb4uski]

....;.In the seminar the planner mentioned that you can't just go by the prospectus expense ratio. You need to include also the other "hidden" fees - management, admin, ... His focus was when you include those fees they are not much different than his charge of 1.4%......

He's either an idiot or a liar, but either one disqualifies him from being your advisor.

His 1.4% is on top of whatever the funds being used charge (not instead of). Stay the course, read and learn and do it yourself and you'll be much better off.

 

[nun]

Run from this FA. Also by "active investing" what do you mean.? Market timing and intense trading or periodic rebalancing?

 

[frayne]

He's selling and plenty of suckers are buying.

 

[braumeister]

Man, what a tough crowd!

Let's give the poor guy the benefit of the doubt.
Assume he wants you to compare a mutual fund with an ER of 1.4% with his management fee of 1.4% and he puts you in a portfolio of only stocks (no funds).

In that case, he's absolutely right.

The kicker is simply that

• you would be foolish in the first place to buy a fund with that ER

and

• the odds are tiny that his stock picks would outpace a low cost index fund.

 

[growing_older]

This is a line of sales patter that mutual fund advisers are taught. It is NOT TRUE but can be easily misunderstood to mean using an adviser won't cost more than do it yourself. It is true that you can find mutual fund with high fees and also that some fund as much or more than 1.4%. But ironically you would never pick those funds unless an adviser steered you into them.

The suggestion that there are hidden fees not included in the ER is a deliberate lie, and if asked about it he will say you misunderstood or mention an usual case of funds that charge an account fee for small balances.

 

[mickeyd]

For entertainment purposes only, I have attended a couple of dozen of these seminars. I am always reminded that current customers are paying for the meals that are consumed by the possible customers.

I once caught a quote from Scott Burns that goes something like this ~"Enjoy the free meal but avoid the kool aid."

 

[Dog]

Just reserved a spot for DH and I for an upcoming seminar (free dinner). I use to avoid these while I was working, but now I have the time
Of course there is no obligation according to the invitation.


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[Walt34]

How do you find these free dinners? I never get invited to those but I get junk mail for financial newsletters all the time.

 

[unclemick]

For entertainment purposes only, I have attended a couple of dozen of these seminars. I am always reminded that current customers are paying for the meals that are consumed by the possible customers.

I once caught a quote from Scott Burns that goes something like this ~"Enjoy the free meal but avoid the kool aid."

Only half a dozen before we started putting on pounds - they wanted our 401k rollover.

heh heh heh - never got one from Vanguard (the one I had already picked). They were cheap/low expenses even back then.

 

[Lakewood90712]

How do you find these free dinners? I never get invited to those but I get junk mail for financial newsletters all the time.

Most of the "Free Dinner" (bait) seminars I have come across are advertised on radio, and you have to call them.

Rubber chicken isn't so bad when it's free.

Back to the OP , advise a u-turn away from the adviser, you can do it yourself

 

[Dog]

They come in the US mail with our name and address. Not sure how I got on "the list". We get 2-3 invites/year. We've never attended one so I guess I'll see if it is worth the effort.


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[travelover]

They come in the US mail with our name and address. Not sure how I got on "the list". We get 2-3 invites/year. We've never attended one so I guess I'll see if it is worth the effort...............

Ditto. I get at least a couple "invitations" per month, though I've never gone to one.

 

[Senator]

I am not sure if his numbers are correct, but at Fidelity they charge a annual fee, AND put you in mutual finds. Double whack...

I get the dinner invites too. Not a bad gig, if you can get them.

 

[pb4uski]

I think I would rather go to the dentist that the "free" meal. Sounds like it it right up there with timeshare freebie pitches.

 

[Lakewood90712]

I am not sure if his numbers are correct, but at Fidelity they charge a annual fee, AND put you in mutual finds. Double whack...

I get the dinner invites too. Not a bad gig, if you can get them.

Hey, on those fees, E.C. "Ned" Johnson III, just wants what is best for everyone, starting with the company first, then the Investor somewhere down the line.

 

[Animorph]

Same spiel my mom's broker used as a hail Mary as we moved her account to Fidelity. Their management fee was outrageous, but no transaction fees were charged. And man, did they trade like crazy. Drove my mom nuts receiving monthly statements with 10 pages of transactions all the time. Funny enough, now that I think about it, she also frequently had a few cents of trading fees sprinkled in, so that 1.4% management fee might have hidden fees as well.


Admin and management fees are included in the published mutual fund ER's. But there are things like trading expenses and notional bid/ask "costs" that are not necessarily included. I was moving into Fidelity's Spartan Advantage index funds, so not much going on there.


With index funds it is easy to find any "hidden" costs, just look at how closely it tracks the index, which is called the tracking error. All the big index funds that I've looked at follow their index (which is calculated without any costs included) very closely. Roughly just the ER below the index performance. Vanguard even played some tricks and made up some of their ER drag. Hidden benefits!


Unless you go with a really high-turnover fund, I don't think non-ER costs are a significant fraction of the published ER. The performance of any mutual fund is reported net of all costs, hidden or not, so if you like the performance numbers the hidden costs are not too bad.