Good morning SOTGC readers. What would you do if you dined in a restaurant and noticed the following on your check:
Maximum deferred sales charge (load): 1%
Management fees: 0.6%
Distribution (12b-1) Fees: 0.75%
Other expenses: 0.61%
“Huh?” You are probably saying to yourself, ”I already paid 30 bucks for the steak and 8.75 percent sales tax. What are these fees that are going to rack up another nearly three percent on my bill?”
Oh, and the great part? Your server informs you he will be charging you another one percent fee for recommending that steak over other items on the menu.
Wouldn’t you try to find a restaurant that serves just as good a steak but without all those extra fees?
Believe it or not, every time you invest in a mutual fund, you are paying some combination of fees of varying ranges. And, if you have a financial advisor who manages your money for you, you’re probably paying another one to two percent annual fee for him or her to choose those funds on your behalf.
When I got laid off from my corporate job, I rolled over my 401K into a self-directed IRA and said “Hasta La Vista, Baby” to mutual funds. My words of wisdom? Research mutual fund fees before putting money into them. If you don’t understand the fees or don’t want to pay them, invest in something else.
There are many alternatives to mutual funds including exchange-traded funds, index funds and individual stocks. Diversification can be achieved without relying on mutual funds and their hidden fees. (In fairness, the fees are not hidden — they are contained in the mutual fund’s prospectus, if you care to read it and most investors do not.)
Not to pick on Wells Fargo, but the fee examples I list above are from the Wells Fargo Diversified Capital Builder Fund which seeks “long term total return, consisting of capital appreciation and current income.” I share the same objective and reach it myself in my own self-directed portfolio. All I pay are small commissions.
Think about it this way…if you invested $10,000 in mutual funds and had to pay one to two percent in fees (not including the fee for your financial advisor) that would amount to an extra $100-$200 that you are not receiving at the end of the year. An investor with a $100,000 portfolio would be paying $1,000 to $2,000. Just because you are not being explicitly charged (like my restaurant example) doesn’t mean you aren’t paying fees, even if the fund is a so-called “no load” fund. The bottom line is your total return would be HIGHER, were it not for those fees chipping away at your money.
What if your financial advisor could construct a portfolio of exchange-traded funds, index funds or stocks that achieved the same diversification of mutual funds and you could pay less than half that through reasonable trade commissions? Well you can. Simply ask your financial advisor to consider putting you in mutual fund alternatives or even better — learn to do it yourself!
Still confused? Watch this video contained in my recent blog: http://www.theoptionslady.com/Blog.html?entry=why-you-should-invest-in
