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Do you know the real fees on your investment account?

The financial and investment industry carries with it a well-deserved aura of corruption and greed.

The SEC constantly investigates questionable Wall Street practices. While a major contributor to the financial crisis and the recession and its aftermath, it seems the New York financial industry never missed a beat in collecting outsized bonuses, to say nothing of outlandish eight-figure salaries.

Much of the money made in the investment segment of the financial industry is collected through fees, whether they are annual, front loads, back loads or based on churn (transaction fees).

It’s not the fees themselves that are the issue; it’s how they are hidden that ends up hurting unsophisticated investors.

A frequent way that investors are unknowingly charged high fees is through mutual funds. Checking your investment account for excessive mutual fund fees is easy and could save you a lot of money.

Mutual fund fees

Sometimes, the same mutual funds have different share classes. They offer the exact same pools of investments. The only differences between them are their share class and fee structure. Excessive mutual fund fees are very common and are an easy way for unscrupulous advisers to make commission at the expense of their unwary clients.

Generally speaking, if the second last letter of the mutual fund symbol is A, B or C, you might be paying excessive fees. If that letter is I or Z, you have the one of the lowest-cost options for that fund.

Different share classes originally were created to give better pricing to large traders with large blocks of cash to invest. The theory is that part of the cost savings of attracting one large investor can be used to reduce the cost to that investor.

But today, the share classes are simply used to bilk smaller investors. Typically, there are minimum investment sizes that are required to get into the cheaper share classes.

Investment advisers often have the ability to invest client assets in the lower cost share classes, but they are incentivized to push money into the more expensive funds because they and their broker/dealer get a kickback of part of the additional fees (front and back loads and 12b1 fees).

If your adviser or broker/dealer enforces minimum investment sizes while the fund does not, you should question whether or not your interests are   being placed first.

All too often, investors are put into these funds without knowing the extent of the fees that are being charged. These fees are charged as a percentage of assets that are in the fund itself. Typically, such fees are separate from the fee that is paid to an investment adviser and disclosed to the clients as the “management fee.” When this occurs, clients effectively are up-charged.

Information on mutual funds and their fees is not hard to find and is readily available on morningstar.com or bloomberg.com or by going to the mutual fund’s website.

Most small investors don’t take the time to research the mutual funds in which they are invested. They leave it to others, the 401(k) company or the broker or adviser to choose for them.

Fees and their effects on returns

Most mutual funds don’t outperform their benchmark, so the implications of high fees on long run returns are substantial. Paying high fees for underperformance is a double negative for investors.

This is particularly true for mutual funds with large front-load fees. For a mutual fund manager to overcome the initial charge (usually around 5 percent) would take years of consistent outperformance.

This is because that 5 percent is not a part of the investment, as it is taken out up front to pay the broker/dealer and adviser (i.e., you are only investing 95 percent of what you paid).

To make things worse, mutual funds with front-load fees sometimes have higher annual fees and sometimes a back-end load. This combination of high fees makes it quite difficult for investors to participate in any of the benefits of active management, and it usually results in substantial underperformance.

Active management

Active management through mutual funds still has many benefits when it’s used properly. For example, active management can provide investors with exposure to unfamiliar markets, investments that require economies of scale, complicated investment strategies and consistent superior performance.

Some money managers may well be worth every penny that they are paid. But it’s a lot easier for a manager to have a positive impact on a portfolio if the fees are reasonable.

Trusting your investment adviser

The general public should be able to trust their investment advisers with their money just like they are able to trust their doctor with their health and their mechanic with their cars.

Investment advisers are supposed to be protectors of their clients’ hard-earned money. They are supposed to allow unsophisticated investors a fair shot at a decent risk-adjusted return.

Unfortunately, the fee incentives can misalign the interests of the client and their adviser. The best form of incentive is a fee arrangement that is a small percentage of the assets with all mutual funds in the lowest cost share classes with no front- or back-end loads or 12b1 fees. Alignment is achieved because the adviser gets paid more only if the account actually rises in value.

Conclusion: Investors should know the all-in fees they are being charged.

In today’s low-interest-rate world, paying appropriate fees could be the difference between a superior performance and a significantly subpar one.


Fee schedule of Different Share Classes of Prudential Financial Services Fund
Fund Ticker
Share Class
Annual Expense
Front Load Fee
Back Load Fee

Source: Bloomberg

Robert Barone (Ph.D., economics, Georgetown University) is a principal of Universal Value Advisors, Reno, a registered investment adviser. Barone is a former director of the Federal Home Loan Bank of San Francisco and is currently a director of Allied Mineral Products, Columbus, Ohio, AAA Northern California, Nevada, Utah Auto Club, and the associated AAA Insurance Co., where he chairs the investment committee.

Contact Robert Barone or the professionals at UVA (Joshua Barone and Andrea Knapp) who are available to discuss client investment needs. Call them at 775-284-7778.

Statistics and other information have been compiled from various sources. Universal Value Advisors believes the facts and information to be accurate and credible but makes no guarantee to the complete accuracy of this information.


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