By Paul Bullock
Investing for the future is one of the best things you can do with your money. Whether you’re saving for a home purchase or planning for retirement, building a nest egg takes time, consistency, and hard work. So, what happens if your investment choice is more of a money suck than a viable asset? Would you even be able to tell the difference from your investment statements alone?
The truth is most people barely look at their monthly investment statements, let alone fully understand what they’re saying. Unfortunately, this keeps many clients invested in assets that don’t make sense for their financial goals and earning way less than they should due to hidden fees and transaction costs. This is particularly true when it comes to mutual funds. Don’t let yourself be caught off guard by the hidden price of investing. In this guide, we’ll explain the components of your investment statement and help you understand the true cost of your mutual funds.
Understanding Your Statements
It’s not uncommon for people to avoid their investment statements out of confusion or frustration about how to interpret the numbers. If this sounds like you, we’ve got you covered! Here is a breakdown of the different components you may see on your mutual fund statement and what they mean:
- Account balance: The total amount in your account as of the statement closing date
- Performance: How much your account value increased or decreased over the statement period due to changes in the market (may be expressed as a percent or a dollar amount)
- Additions & withdrawals: Includes any money added to your account (deposits or reinvested dividends), as well as any money taken out of your account (withdrawals or fees)
- Total change: The total change in your account balance that occurred over the statement period from all contributions, withdrawals, gains, losses, and fees
- Holdings: A summary of what you’re invested in; usually expressed as a pie chart, your statement will probably use words like equities (stock) and fixed income (bonds) to describe your asset allocation.
Understanding the Expense Ratio
An expense ratio is essentially the cost of doing business as a mutual fund. These costs are then passed through to the shareholder in the form of various fees that roll up into the expense ratio.
This is a key component of understanding mutual funds, yet they are not itemized on your account statements. Rather than listing out the expenses, they are automatically deducted from the value of the fund shares on a daily basis. This directly impacts the return received by shareholders like you.
To make it even more complicated, expense ratios are often expressed as a percentage of the fund’s average net assets rather than a flat dollar amount. For instance, average expense ratios range from 0.5%-1.0%, (1) meaning that for every $10,000 invested, $50-$100 is lost to fees every year.
Understanding Your Fees
To truly understand the expense ratio, you must first understand the fee structure of a mutual fund. Management fees are taken from the asset pool, so you will pay for these fees through a reduction in investable assets.
Transaction fees and other hidden costs are usually charged regardless of how well the fund performs, and, at any given time, a significant portion of investment returns could be lost to fees, (2) such as:
- Management fees: The administrative costs for the day-to-day investment of the fund, including transaction costs for buying and selling shares
- 12b-1 fees: The cost to service, distribute, and market the fund
- Sales load: A fee related to the purchase of shares
- Redemption fees: Charged when you sell shares of the fund
- Exchange fees: Charged if you transfer your shares to another fund within the same fund group
- Account fees: Charged for account maintenance if your account falls below a certain amount
- Purchase fees: A fee that may be charged when you purchase mutual fund shares, often in addition to the sales load
Working With a Fiduciary Financial Planner
It used to be that mutual funds were one of the most popular ways to invest, but, due to excessive fees and lack of transparency, that has been changing recently. Exchange-traded funds (ETFs) and index funds offer similar exposure to a wide array of investments—without the price tag of a mutual fund.
Working with a fiduciary financial planner is a great way to reduce fees as well. Since he or she is legally obligated to act in the client’s best interest, a fiduciary financial planner does not make money by charging transaction fees and can help you spot a money-sucking investment over one that maximizes your potential return.
How We Can Help
At Wellington Investment Advisors, we’re here to help you make the most of your investments by avoiding unnecessary fees and expenses. If you have questions about your mutual funds or would like to learn more about cost-efficient investment strategies, we would love to hear from you! Schedule a no-obligation introductory meeting or reach out to me at paul@wellingtoninvestmentadvisors.com or by phone at (812) 333-0874.
Be sure to check out what some of our clients say about working with our team at Wellington Investment Advisors to learn more about how we can help you.
About Paul
Paul Bullock is CEO of Wellington Investment Advisors, an independent, boutique fiduciary firm serving pre-retirees and university faculty across Indiana. With over 32 years of financial experience, Paul is committed to building long-term relationships through thoughtful, personalized investment advice and guidance. He focuses on a disciplined tactical asset allocation approach to money management through a strong understanding of economic and market conditions and strives to build trust with clients by providing sound guidance. Paul understands the hard work his clients have put in to arrive at where they are today and wants to see them succeed in their goals for the future. Paul graduated from the University of Texas with an MBA, as well as a bachelor’s degree in finance, and has been dedicated to assisting clients with their financial needs ever since. When he is not working, Paul enjoys time with his family and is also an avid equestrian polo player who helps raise money for over 18 different charities through his playing. To learn more about Paul, connect with him on LinkedIn.
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(2) https://www.nerdwallet.com/article/investing/mutual-fund-fees-what-investors-need-to-know