8/5/2020
Fees are a part of any investment, recognizing and minimizing them are key to increasing returns.
Fees work in direct opposition to investment returns. The larger the fee, the lower the return. Over the course of an investor’s lifetime, the difference between paying low fees and high fees can have a dramatic influence on portfolio values.
Below is a chart of why fees matter. If an investor put $25,000 into a retirement account, after 30 years of average stock market returns, while paying 1.5% in fees, they would have accumulated $380,000. If fees were only 1%, the investor would have $436,000. And if the investor only paid 0.5% in fees, they would have $500,000.
The financial industry has a long, and notorious history of hiding and obfuscating fees from their clients. Below is an unvarnished list of the fees that investors pay, sorted by the highest fees to the lowest. Fees are not the only element to judge an investment by. Fees should be judged within the context of the returns they pay for.
Loaded Mutual Funds
Annual Fee %: Up to 5.75%*
Frequency Paid: Usually these are front-end loads, which are also charged to any subsequent purchases. There are also back-end loaded funds, and redemption fees.
Commentary: The worst investment fees around. These loads destroy investment returns, and they are in addition to the regular fees charged by mutual funds. There is NO reason to own loaded mutual funds.
Variable Annuities
Annual Fee %: Combined Fees are 2.5%-5%
Frequency Paid: Most fees are paid annually including: Mortality & Expense charges, underlying Expense Ratios, Administrative, Sales Commissions, and additional Rider fees
Commentary: The only investment that can claim “guaranteed returns” is choked with fees that lower that “guarantee” to a nominal percentage. Currently, “guaranteed returns” do not exceed 2% on a new annuity. On top of the annual fees, are one-time Surrender Charges, which can run as high as 8% of the investment in early years.
Hedge funds
Annual Fee %: Usually 2%, plus 20% of profits
Frequency Paid: Quarterly
Commentary: These sophisticated investments have consistently under-performed market benchmarks, with few exceptions, over the past 20 years. High fees and a large cut of the profits have not helped their performance.
401(k) plans
Annual Fee %: Usually 1% to 3%
Frequency Paid: Quarterly
Commentary: In addition to Plan Administration fees, Investment fees, and Individual service fees, are the fees for the underlying investments-- which can include any of the fees on this list. These fees are often inescapable if your employer has signed on with a plan administrator.
Investment Advisors
Annual Fee %: Usually 0.75% to 1.50%
Frequency Paid: Quarterly
Commentary: Studies have shown that RIAs (Registered Investment Advisors) on average add 3% to investor returns. Fees are usually lower for larger accounts. Additionally, trade fees and mutual fund expense ratios are usually paid by the investor.
No-load Mutual Funds
Annual Fee %: Usually 0.5% to 1.25%*
Frequency Paid: Daily reflected as a reduction of NAV (Net Asset Value)
Commentary: Equity fund fees are usually more than Hybrid fund fees, which are more than fixed income fund fees. Some funds also charge trading commissions.
Starboard Wealth Management
Annual Fee %: 0.4% to 0.6%
Frequency Paid: Quarterly
Commentary: Our registered investment advisory is focused on charging the lowest possible fees (half the industry average) and delivering the highest level of service.
Robo-Advisors
Annual Fee %: 0.2% to 0.5%
Frequency Paid: Quarterly
Commentary: Investment decisions are based on computer run algorithms. They are useful for small accounts, but lack of human interaction and nuance erodes value for larger accounts.
Corporate and Municipal Bonds
Annual Fee %: 0.1% to 1.4%
Frequency Paid: When the asset is bought or sold
Commentary: In addition to any in-house mark-ups or mark-downs, a transaction fee per bond is applied.
Index ETFs
Annual Fee %: 0.03% to 0.2%*
Frequency Paid: Daily reflected as a reduction of NAV (Net Asset Value)
Commentary: A good option to own a large swath of the market, at a low cost. Some funds also charge trading commissions.
Stocks & U.S. Treasuries
Annual Fee %: Usually $0
Frequency Paid: When the asset is bought or sold
Commentary: With most brokerage commissions dropping to $0, stocks and U.S. Treasury bonds, bills and notes (not including agency bonds) are free of fees.
*For mutual funds and ETFs, the expense ratio is used to include all fees
Justin Hudock
Starboard Wealth Management
Marstons Mills, Massachusetts