posted on October 27th 2016 in Fort Worth CFP Team Posts with 0 Comments /

If you think investing should be free, you are living in a fantasy land. Nobody is donating their time, expertise and technology to you for free. There is ALWAYS going to be a cost to doing business. What I want to show you are pointless fees that hurt your financial plan. The one I’m discussing today is the cost of turnover inside funds. Now, ALL funds aren’t nearly as dramatically bad, so be careful not to throw out the good with the bad.

The first thing you must understand is that the cost I am talking about is not part of the management fee or expense ratio. If you’ve learned how to look-up the expense ratio inside a mutual fund, that’s good. But this fee is different.

Recently, a client sent me the name of a mutual fund a friend of his owned. The friend explained how special this fund was and how it considered volatility and tried to take a neutral market view. My client said he was trying to tell his friend how we ran a similar sounding strategy for him, but sought help in explaining to his friend why he ought to look at WorthPointe instead of buying the fund. I took a look at the fund, and here is what I found.

The expense ratio was about 2.7%; that’s the fee paid to the mutual fund manager. If the fund was sold by a broker, that person may be charging him another management fee on top of that. Those fees are pretty easy to find for someone who has been around investing for a while. However, what the client was not aware of was how much the fund was spending every year just trading the account. The only way you can understand these costs is literally to figure them out yourself using figures you can find in the fund prospectus. According to the prospectus, the fund was managing about $225mm in client money, and had spent about $1.7mm in trading fees last year. Another way to look at this is that is trading fees would’ve been zero, then the firm would be managing $226.7mm.  Since all fees are spread equally among all shareholders according to how many shares they own, we can estimate what percentage of assets are eaten up by trading fees by using some simple division using these two inputs ($226.7mm & $1.7mm), which comes out to about 0.75%.  It’s not reasonable to get rid of all trading fees, but adding another 0.75% to an already expensive fund is painful.. In other words, the total costs on the fund were nearly 3.5% every year, and that’s before the recommending advisor (broker) was even paid!
Like I said, there is no way to get around all the costs of investing especially if you want something professional and not just a cookie-cutter portfolio full of products with hidden fees. I haven’t covered ALL the things that could be dragging down your investment performance, but I hope you are working with a fee-only Certified Financial Planners™ (CFP® professional) who owes you a fiduciary duty at all times. Such a professional should keep the total cost of investing in mind at all times.

about the author: Joshua I. Wilson CMT

Josh-Wilson CMTJoshua I. Wilson, CMT®, AIF® is a partner and wealth manager who has managed over $2B for TD Ameritrade. Joshua led the national training and development program for all of TDA’s new advisors and managers, won a national coaching award. Joshua gave his graduation speech at Brown University. Joshua is a Chartered Market Technician® (CMT®) and a Accredited Investment Fiduciary® (AIF®).

Learn more and/or Contact Joshua

Continue Reading

Other articles filed under Fort Worth CFP Team Posts

The 3 Biggest Misunderstandings About Options

November 3, 2017 - In part 1 of this series, I described the main ways options are used (income, protection, favorable stock entries and diversification) as well as how they compare to stocks, risk-wise. Now, let’s talk about the biggest misunderstandings people have about...
Continue Reading

Ask the Chief: Why is Gamma the Same for Call and Put Options?

October 23, 2017 - Before I answer, I should warn anyone who is new to options trading that understanding my answer to this question requires you to already have a basic understanding of options. The truth is, all calls and puts don’t have the...
Continue Reading

Joshua Wilson to be a Featured Speaker at Private Wealth Texas Forum Houston

October 16, 2017 - Joshua Wilson, Chief Investment Officer at WorthPointe, will speak at Private Wealth Forum Houston on October 25, 2017. The event will take place at the Houston Club. For more details, visit the event website.
Continue Reading

Rick Wilkinson Earns Five Star Professional Designation

October 11, 2017 - Congratulations to WorthPointe’s own Rick D. Wilkinson, CFP® for being named a Five Star Professional! The Five Star award is presented to wealth managers and other professionals in 45 markets in the U.S. and Canada. Five Star Professional conducts research...
Continue Reading

Joshua Wilson Will Moderate Discussions at ALTSTX

October 9, 2017 - On October 17, Joshua Wilson will attend ALTSTX, where he will moderate discussion on current trends in hedge funds, entitled “In Memoriam: The Superstar Hedge Fund Manager.” ALTSTX was developed as a local, investor centric and educationally focused one day...
Continue Reading

Return to Blog Home