Give Fees an Inch, and They’ll Take a Mile

March 1, 2014. Jeff Sommer. New York Times.

[I’ve shortened and paraphrased much of the article, go to the link above to see the full article. My comments are in brackets]

Investment expenses will cut your returns, shrink your nest egg and may prevent you from achieving your financial goals. The SEC shows you the impact in a bulletin for investors called “How Fees and Expenses Affect Your Investment Portfolio”.

An example in the SEC bulletin shows that you’d lose $40,000 over 20 years on a $100,000 investment that grew 4% per year with a 1% annual fee: A THIRD OF YOUR INVESTMENT.  And if it’s not tax-sheltered, the IRS will get additional money as well.

If your portfolio earned less than 4%, the impact will be even greater.

And many hedge funds, mutual funds, 401K, and brokerages charge more than 1% per year.  In fact, the average expense ratio fee on an actively managed mutual fund is 1.26% according to Morningstar.

And the expense ratio is not the ONLY fee — the actual amount could be much higher!  The S.E.C. encourages you to see what the additional fees might be in the prospectus:

Commissions. You will likely pay a commission when you buy or sell a stock through a financial professional.

MARKUPS That is the term used when a brokerage firm — strictly speaking, a “broker-dealer” — sells you securities that it is holding in inventory and charges you a price higher than the market price.

SALES LOADS These are charged by some mutual funds, and they come in many varieties. Front-end loads are assessed when you make an investment; back-end loads are charged when you sell it.

SURRENDER CHARGES These are imposed when you withdraw early from an investment in a variable annuity, which is another big subject in itself. The S.E.C. put out a separate bulletin on variable annuities recently, highlighting the complexity and the multilayered fee structure that are common for them.

Then there are additional, continuing fees and expenses.  Here are just 2 of them:

INVESTMENT ADVISORY FEES These are often charged by advisers and may be based on the amount of assets in a portfolio.

401(K) FEES On top of annual operating expenses for mutual funds and E.T.F.s, there are additional fees for 401(k)’s, expenses for operating and administering retirement plans, and they may be passed on to employees.

These fees aren’t simple or all-inclusive. You may be charged additional brokerage fees for not maintaining a minimum balance, as well as for account maintenance, account transfer, account inactivity, etc. “These fees may not always be obvious to you from your account statement or confirmation statement,” the S.E.C. warned. “You should obtain information about all the fees you are charged and why they are charged.”

You can’t avoid all fees, but you can pay less if you shop around.

To research brokers see Finra’s BrokerCheck service. For advisers registered with the S.E.C., you may use the agency’s Investment Adviser Public Disclosure website. [If you trust brokers, please read Belfort’s “Catching the Wolf of Wall Street: More Incredible True Stories of Fortunes, Schemes, Parties, and Prison” or see the movie based on this book “The Wolf of Wall Street”]

18,000 Mutual fund and E.T.F. annual fees can be researched at Finra’s Fund Analyzer a Finra website, the brokerage industry’s self-regulatory organization.