"Are You Paying Too Much For Mutual Funds?"

"...you may be paying twice as much for half of the service.

I see managed account options where you pay fees of 2.5 percent a year to own a portfolio of mutual funds, and you pay a $95 transaction fee whenever fund shares are bought or sold. Yikes. That is a lot of money.

Not only are you paying a lot, but you’re also getting little in return. Many investment firms that charge this way provide no meaningful financial planning. And the portfolio returns usually underperform a comparable portfolio of index funds.

In the last week alone, I’ve come across three such high-fee, low-service offerings.

...According to a Morningstar study that looked at fund performance periods from 2005 through March 2010, the single biggest predictor of mutual fund performance is fund expenses. The lower the expenses, the higher the returns of the fund will be. Think through this logically and it makes sense. A fund with high expenses must earn back its fees before it can begin making money for you. It has a higher hurdle to overcome to move into positive territory.

...All-too-often I see these high-fee funds placed inside of a managed account, where another layer of fees are applied, often in the range of an additional 1 percent to 1.5 percent a year. Recently I've seen this high-fee structure flourishing in the managed account options offered within the benefit plans used by our fire departments and police forces.

With this structure you end up paying 2.5 percent to 3 percent a year to own the same underlying investments that you could own for half that price when working with a fee-only advisor who uses index funds.

...A mutual fund packages together a group of stocks or bonds, manages those securities and offers you the ability buy them in a bundle. Of course they charge for this, and some fund structures naturally have a higher cost than others.

...If your financial advisor is compensated based on selling you a certain selection of funds, the advice you are getting may not be in your best interest."


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