In our last blog post, we tipped our hand on the first subject we’re tackling in the new year: Fees, Inglorious Fees. By resolving to better understand and manage the costs of investing, you can start off the year right by addressing one of the greatest investment challenges you’ll face in 2014. I say this with confidence because, regardless of what surprises the year has in store, reducing excess fees is one of the few – and best – ways you can control your financial future; no psychic abilities required.
Familiarity With Fees Should Breed Contempt
If minimizing excess fees is such a big deal, why doesn’t every investor pay rabidly close attention to them? We can think of at least three reasons:
- It gets pretty damn complicated. There are a lot of different costs to investing, some of them more obvious than others. Even the “obvious” ones tend to be buried in dense disclosures, without the context you need to compare them to a norm. In other words, it’s hard to find all the costs, let alone recognize when they’ve shifted from reasonable to outrageous.
- The industry doesn’t want you to know. If you ask us, it’s no accident that it’s so hard to make sense out of the available information on costs. Most financial intermediaries make their living by placing your trades and/or selling you products, whether or not it’s in your best interest to trade or buy them.
- You don’t want to know. Before we lay full blame on the industry, some personal soul-searching is warranted. When is the last time you insisted that a financial professional explain this stuff to you in a way that made sense? To mete out some tough love, once you’ve read this blog, you can no longer plead full ignorance of the laws of investing.
Let’s chip away at some of the complexities with a breakdown of common investment costs.
These are the most obvious costs. They’re the ones that show up in a fund’s prospectus under categories such as operating expenses, sales charges/loads and 12b-1 fees (a fancy term for “kick-back,” but I digress). I could go on a rant about which costs are deemed reasonable and which, not so much. We’ll save that for a future post and say that at least these are the costs you can face head on. Investors who fail to scrutinize disclosed fees are passing up among the easiest, most effective ways to manage costs.
One of the easiest ways to find disclosed costs is to head over to Morningstar’s website, a free and objective resource for quickly evaluating and comparing disclosed costs. From Morningstar’s home page, type in the fund name or ticker symbol in the “Quote” box at the top of the screen. After the page loads, look for “Expenses,” which is expressed as a percent-of-assets fee. (For example, a 1.00% expense fee on a $10,000 investment would cost you $100 annually.) For a more detailed look at fees, click on the “Expense” tab.
Morningstar Mutual Fund Detail Page
Why do some comparable funds cost more than others? Sometimes, fund managers are simply hogging more for themselves (such as when they charge sales loads). Other times, they are taking on more hidden costs than are necessary in their trading activities – and then passing those costs on to you. As we touched on in our blog post, “Getting to Know Dimensional,” one of the reasons we frequently employ Dimensional Fund Advisor funds is because they are masters at aggressively minimizing a host of hidden costs on behalf of investors. There’s a lot of jargon associated with hidden costs, such as bid-ask spreads, market-moving trading and bond mark-ups/mark-downs. Want to know more? Contact me today.
Your Own Costs
The right fund in the wrong hands can end up costing every bit as much as a poorly managed fund. So consider what you, the investor, can do to help even the highest-minded fund manager minimize your costs. The goal is to use low-cost funds to develop a globally diversified portfolio that accurately reflects your goals. Then, to paraphrase financial writer Larry Swedroe, you must stick with your portfolio like a stamp sticks to a letter. You’ll not only increase the odds of reaching your desired destination, you’ll do so with fewer trades, which equals fewer costs.
Need we say much more? Within your taxable accounts, the impact of taxes can be dramatically debilitating, providing yet another reason to seek tax-wise fund managers and to minimize hyperactive trading of your own, especially when it triggers taxable gains.
When it comes to managing investment costs, we could go on and on. And, in fact, we will! In our next post, we’ll discuss our own, Pathway Financial Planning advisory service fees and provide five simple steps you can take to adopt and readily maintain a reduced-fat-fee diet in 2014.
For more information or to set up a consultation, contact Pathway Financial Planning at 248-567-2160 or email firstname.lastname@example.org.