During this week’s wisdom, we are going to focus on the fees inside different investment programs. Specifically, managed money and mutual funds. Fees and commissions are often made to be very controversial, and sometimes difficult to interpret, but today we are going to demystify them and give some facts about how they can play a role in your decision making process.
Managed Money programs, where you have a professional money manager selecting different securities you can buy and sell charge management fees, administrative fees, potentially custodial fees, and perhaps “other” fees. Additionally, an investment advisor can charge a fee to help you select and monitor the right money managers based on your goals and objectives. All of these fees are quoted as a percentage of the Assets under management and you can find the description of these fees inside the Investment Management Agreement.
Generally speaking a fair fee for ALL of these costs could range from 1.5-2.0%, so if you had 100K you might pay 1500-2000 a year. it depends on the type of fund it is, how the money is invested and the amount of money involved. These managed money platforms vary and have different pros and cons that an advisor can help explain to you.
Mutual funds work similarly except the total cost is quoted as “total operating expenses” and there may be some different types of costs listed like 12b-1 fees which are the costs associated with marketing and distributing the fund. With mutual funds, a fair fee is about the same as managed money 1.5-2%. The mutual fund and managed money differ because you can get more customization with your own professional manager instead of being pooled with other investors like in a mutual fund.
Additionally, In mutual funds there is sometimes a sales load or commission charged by a registered representative but this kind of arrangement is becoming obsolete for the most part.
You want to refer to the fund prospectus for the detailed charges on a mutual fund.
The magic question is are these fees justified or should you “do it yourself”. There are ways to buy and sell your own mutual funds or securities and while these methods are not “free” they are less expensive. You can get a passive index fund for .25%. Is it worth it to pay an extra %age point or so for a professional? I believe the cost is only an issue in the absence of value and
I can tell you that Based on several studies, from companies like Fidelity and Vanguard (that offer both options to consumers) it is well documented that people do better while working with a professional. Usually about 3% better after fees according to the studies they conducted.
The devil is always In the details and everyone has a unique situation.
Remember, when it comes to investment decisions we believe you should never say never never say always it depends.