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Mutual funds, index funds, and financial advisors all have one thing in common... Fees.
Mutual funds, index funds, and financial advisors all have one thing in common...
And lots of them.
In this episode, I discuss...
- The two big buckets of fees you pay to own mutual funds - annual fund operating expenses and shareholder fees.
- The 10 - yes, count 'em 10 - fees you pay when you own a fund in your 401(k).
- The exact amount you'll give away in fees holding funds in your retirement account over 30 years. (Spoiler alert: it's 6-figures.)
This is the My Money My Freedom podcast, where we unpack and simplify all things money so that you'll always have more than enough to live your best life for life. Now here's your host. Financial coach Susan Lassiter-Lyons.
In the last episode of the My Money, my Freedom podcast, I talked about financial advisors and how they get paid. I mentioned that the biggest issues I personally have with financial advisors are what I call the three F's fiduciary funds and fees.
And in this episode, I want to dive a little deeper into fees, especially as they relate to mutual funds to let you know just how much of your hard earned money you're losing to these fees every single year.
So if you use a financial advisor, you pay about 1% of your money every year to him or her for their services.
So that's about 1000 bucks for every $100,000 that they manage every year, year after year, and for that fee, they invest your money into funds, mutual funds and index funds that also charge fees. Now all the fund is is a collection of individual stocks that you pay somebody else to pick for you.
So if we carry this out, you pay a financial advisor 1% of your money every year, $1000 for every 100,000 that they manage. Then you pay fees to the fund manager to. So if that fee is also 1% then you're paying 2% just in fees to have somebody invest your money in a fund that somebody else actually manages.
I'm not down with that, you know.
Now, mutual fund fees generally generally fall into two big buckets annual fund operating expenses and shareholder fees. So annual fund operating expenses are just ongoing fees toward the cost of paying managers, accountants, legal fees, marketing and stuff like that. Shareholder fees are sales commissions and other one time costs when you buy or sell mutual fund shares.
Now, the details on all these fees can be found in the mutual fund's prospectus, which is just a legal document that each mutual fund is required to file with the Securities and Exchange Commission.
And you can find this document on the mutual fund's website and then download it and just search for the terms, annual fund, operating expenses and shareholder fees, and you should be able to see exactly what fees your mutual fund is charging you.
Now ongoing fund operating fees are unavoidable. You're going to have to pay something to keep the lights on at the funds management offices. But different kinds of funds require different overhead costs Now. These fees, also known as mutual fund expense ratios or advisory fees, typically are between uh, quarter of 1% and 1.5% of your investment in the fund every year.
So, generally speaking, if the fund is actively managed and that means that they're trying to beat the average stock market return, then those costs are going to be higher than for a passively managed fund like an index fund, for example, which really just try to mirror or replicate the returns of some sort of a benchmark stock index like the S and P 500.
So to find those costs, look on this prospectus for the funds total annual operating expenses, and you're going to find ongoing costs there that might include management fees, right, the costs to pay the fund managers and their investment advisors 12 B 1 fees.
Um, those are fees that pay for the cost of marketing and selling the fund and other shareholders services, and those fees are usually captain about 1%. You'll also see other expenses, and those other expenses might include, like custodial fees, legal fees, accounting fees, transfer agent expenses and other administrative costs.
So the total annual fund operating expenses are expressed as a percentage of that funds net average assets. But all it means to us is that lots and lots of people have their money in the pocket of these funds. Now let's talk about shareholder fees now.
These fees may include sales loads. Those are the commission's that you pay when you buy or sell mutual fund shares.
Redemption fees. Funds may charge that fee if you sell shares within a really short period of time after you purchase them, um, that could be anywhere from just a few days to over a year, depending on the fund and exchange fee, which is a fee that some funds charge shareholders if they exchange or transfer shares to another fund offered by the same investment company account fee, which is a fee that's charged to just maintain your account.
Um, often if your balance falls below a specified minimum investment amount or account threshold a purchase fee, which is just a fee paid to the fund at the time of purchase, which is different than a front end sales load, which is paid to the broker for selling the fund right?
So speaking of loads, we also have load funds versus no load funds. And as the name implies, load funds would impose sales loads or commissions that you pay to those brokers when you buy and sell shares. And the commissions are calculated again as a percentage of the amount that you've invested in the fund. So a feed paid at the time of purchase is called the front end load, while a feed paid at the time of sale is a back end load.
Now I personally think it's a load of something else. But if I say what I really think about all of these load fees, this episode would probably get slapped with an explicit content warning, so I won't.
Any who, funds that don't set sales loads are called no load funds, and brokers may also charge transaction fees for buying and selling mutual funds. Those transaction costs usually are a flat rate fee that range anywhere from 10 bucks to like $75.
Now, as more and more investors look for low cost ways to grow their retirement portfolios and reduce costs, more and more brokers are offering no load and no transaction fee mutual funds. For example, Um brokerage platforms like E Trade and Charles Schwab each offer more than, like 4000 no transaction fee funds.
But here's the deal. Even if the mutual fund doesn't set sales loads, it still may charge redemption, exchange account and purchase fees.
Now there's something else that we have to talk about. We talk about sales loads and how they are assessed, and the way that these fees for sales loads are assessed is dependent on what class of shares you buy.
So A class shares have a front end sales load, which are typically between two and 5% of your total investment.
B Class shares have a back end sales load, also known as a contingent deferred sales charge, or C. D. S. C, which you don't pay unless you sell your shares before a specified time period, usually up to seven years after the original purchase.
And investors are charged on a sliding scale, depending on how soon they were deemed their shares after the original purchase. So it definitely pays to stay invested.
And B class share funds typically charged higher ongoing annual fees than Class A share funds do now See class shares may carry commissions charged every year that you own the fund or they may have a back end sales loads similar to the B class shares.
The deal is really if you're investing in a mutual fund through a financial professional, make sure that you ask that person to explain all of the charges and fees that may apply, including his or her own fees. And remember that a fund with high costs has to perform better than a low cost fund to generate the same returns for you.
Oh, and also don't forget that if you're investing in a mutual fund via your 401 K, then there's also a 401 K fee, which is just an admin fee to maintain the plan that your employer passes on to you.
So even a small brokerage fee is going to add up over time. A few investment fees together can significantly reduce your overall portfolio return.
So if your portfolio was up like 6% for the year but you paid 1.5% in fees and expenses, then your return is actually only 4.5%. And over time that difference really adds up. So how exactly do all these fees impact your returns?
Well, I'm gonna put a link to a really great mutual fund calculator in the show notes. That's going to help you calculate it for your specific situation. But for now, let's just pretend that you're putting $500 a month into a brokerage account every year for 30 years. So over 30 years, 500 a month.
That means that you're depositing a total of $180,000 over that time, and you're earning, let's say, an average annual 7% return. Well, if you paid 2% in fees each year, you would give up more than 100 and $78,000 over 30 years, almost as much money as the $180,000 totally that you deposited in the account during that time.
So, yeah, that's a lot of fees.
You guys want to know how you can avoid all that?
Start managing your own money.
It's super simple. When you follow a proven framework and a plan like my infinite income method.
We don't have to pay fees to an advisor because we don't need one.
We don't have to pay fees to a fund manager because we invest in individual stocks, not funds.
And we don't even have to pay commissions to buy and sell stocks in our IRA.
You learn it, you do it. And guess what?
You save yourself $180,000 over 30 years because I know that you have better things to do with 100 and $80,000 than willingly handed over to some Wall Street dude.
Thanks for listening to My Money My Freedom. Visit our website at mymoneymyfreedom. co and follow us on Instagram @mymoneymyfreedomhq