Could Your Mutual Funds “COST” You Your Prosperous Retirement?

“What you don’t know, can hurt you” – John Bradshaw


Three years ago, one of my clients called the office and asked if I would review a mutual fund account she opened before I became her advisor that she had concerns about. I inquired about her concerns with the mutual fund account, simply put; she could not understand why the mutual fund account was not growing. As we just finished the first week of the fourth quarter in 2018 and as the S&P 500 posts worst week in nearly a month as rates pop[1], I believe many investors are asking the same question, “why are my mutual fund accounts not growing?”


I will submit that the concerns many investors have about their mutual funds accounts are warranted and valid.  There are over 9,356 mutual funds available in the United States as of 2017. Over $18 trillion dollars total net assets of mutual funds in the United States and over 157 million households owning mutual funds based on 2017 estimates.[2] With the popularity of mutual funds and the vast amount of dollars being invested in these instruments, I am shocked at how many people are unaware that their mutual funds could “cost” them their prosperous retirement.


My client I mentioned earlier, after completing her analysis I realized that her mutual fund account was not growing because the costs of her mutual fund expenses annually were over 9%. Yes, 9% annually.  My client’s fund’s expenses were unusually high, on average mutual fund expenses are around 3.17%[3] and most investors are paying these expenses and are not aware. The best explanation I have read regarding the costs of mutual funds is summarized here by Adam Hayes,


“The costs involved with purchasing a mutual fund are not always as straightforward as buying a share of stock. To buy stock, you simply pay your broker the agreed upon commission. Mutual funds may also involve a broker fee, but since these are professionally managed funds, there are other expenses involved. The fees involved vary widely across the spectrum of mutual funds, and are one of the biggest drawbacks to these kinds of investments. Sometimes fees are hidden or obscured with complex language, and critics say often the average investor does not understand everything that he or she is paying for.”[4]


Understanding the costs of your mutual fund accounts could mean the difference between you having a prosperous retirement or one where you fall short of your expected outcome.  As you continue to prepare for your retirement understand the three “R’s” regarding mutual funds:


Revenue Sharing– Revenue sharing, as defined by the Securities and Exchange Commission, occurs when the investment advisor to a fund, or another affiliate of a fund, makes payments to a broker/dealer. In some cases, the investment advisor may describe those payments as reimbursing the broker/dealer for expenses it incurs in selling the shares. Those payments, regardless of whether they are labeled as reimbursements, may give the broker/dealer a greater incentive to sell the shares of that fund or affiliated funds.[5] Be aware that the mutual fund that is being recommended to you by an advisor may not be the fund that is in your best interest but in the financial interest of the person recommending the mutual fund to you because of the incentive of revenue sharing. The higher compensation that the advisor makes because of revenue sharing, costs you in the long run because of higher mutual fund expenses charged to the fund to cover the additional dollars to the advisor. The more you save on fees and other trading expenses, the higher the returns you’ll get and the more money you will have.[6]


Risk Factors– The level of risk in a mutual fund depends on what it invests in. Many mutual funds are being selected as good retirement options because the advisor focused on past returns, but overlooked the important factor of the inherent risk. There are risks that must be considered prior to investing in mutual funds and they are market risk, liquidity risk, political risk, interest rate risk and credit risk. Depending on whether you are investing in stocks, bonds or fixed instruments will determine which of the five risks you will face.  Many investors are investing without considering the inherent risks of their mutual funds and whether the funds are congruent with their risk tolerance, time horizon and retirement goals. I encourage everyone reading this blog to contact our office about having a no-obligation no cost risk analysis performed on their mutual fund accounts so you may be proactive and not reactive to your fund’s inherent risks.


Ratios– There are two ratios you should know regarding your mutual funds and they are expense ratios and turnover ratios. An expense ratio is the cost investment companies charge investors to manage a mutual fund or exchange-traded fund (ETF). This ratio is calculated by dividing a mutual fund’s operating expenses by the average total dollar value for all the assets within the fund. The expense ratio for mutual funds is commonly higher than expense ratios for ETFs.[7] Fund expenses can make a significant difference in investor profitability. My client I referenced earlier, the mutual fund she was invested in realized an overall annual return of 8%, but charged expenses that totaled 9%, then 100% of the fund’s gross profit was taken up by fees. So right there, the answer to why her account was not growing was provided. The mutual fund was charging more in fees than it was earning in returns. The final ratio to know is turnover ratio. The turnover ratio is the percentage of a mutual fund or other investment’s holdings that have been replaced in a given year, which varies by the type of mutual fund, its investment objective and/or the portfolio manager’s investing style.[8] Why is turnover ratio so important for you to know? Each time a mutual fund is replaced or a turnover takes place, those transactions have a cost, which will be passed on to the investor—and the more transactions there are, the more the costs build. There are consequences for dividend income or capital gains.[9] One look at Morningstar data showed that the average mutual fund had an annual turnover ratio of about 89%. That means the typical fund buys and sells nearly its entire asset base every year.[10] The unnecessary costs and frequency of turnover in a mutual fund can create havoc on your retirement plan in fees and taxes.


In conclusion, I believe now more than ever it is important to understand the “cost” your mutual funds can have on your retirement plan.  If you are concerned or have questions regarding your mutual funds give us a call and we would be happy to analyze your funds to give you peace of mind that your retirement will be prosperous.












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