BREAKOUT OF TYPICAL MUTUAL FUND FEES - From Money - Master the Game by Tony Robins

  1. Expense Ratio. This expense is the main “price tag”—the number they want us focused on. But it certainly doesn’t tell the whole story. According to Morningstar, US stock funds pay an average of 1.31% of assets each year to the fund company for portfolio management and operating expenses such as marketing (12b-1 fees), distribution, and administration. (Many of the larger funds have realized that a 1% ballpark expense ratio is where they want to come in so that investors don’t flinch and brokers have a good story to tell.)
  2. Transaction Costs. Transaction costs are a broad, sweeping category and can be broken down further into categories such as brokerage commissions, market impact costs (the cost of moving the market as mutual funds trade massive market-moving positions), and spread costs (the difference between the bid-and-ask or the buy-and-sell price of a stock). A 2006 study by business school professors Roger Edelen, Richard Evans, and Gregory Kadlec found that US stock mutual funds average 1.44% in transaction costs per year. This means that these transaction costs are perhaps the most expensive component of owning a mutual fund, but the industry has deemed it too tough to quantify, and thus it goes unreported in the brochures.
  3. Tax Costs (or 401[k] Costs). Many people are excited about the “tax-deferred” treatment of their 401(k), but for most employees, the tax cost has been swapped out with “plan administrative” fees. These are charged in addition to the fees paid to the underlying mutual funds, and according to the nonpartisan GAO (Government Accountability Office), the average plan administrator charges 1.13% per year! If you own a mutual fund in a taxable account, the average tax cost is between 1.0% and 1.2% annually, according to Morningstar.
  4. Soft-Dollar Costs. Soft-dollar trading is a quid pro quo arrangement whereby mutual fund managers choose to pay inflated trading costs so that the outside firm executing their trades will then rebate the additional cost back to the fund manager. It’s a rewards program for using a particular vendor. The frequent flier miles of Wall Street. The fund manager can use these funds to pay for certain expenses such as research and reports. These are costs the fund manager would otherwise have to pay, so the net result is that you and I pay! These are simply well-disguised increases in management revenue that hit the bottom line. They’re unreported and nearly impossible to quantify, so we aren’t able to include them in our equation below, but make no mistake, it’s a cost.
  5. Cash Drag. Mutual fund managers must maintain a cash position to provide daily liquidity and satisfy any redemptions (selling). Since cash is not invested, it doesn’t generate a return and thus hurts performance. According to a study titled “Dealing with the Active,” authored by William O’Rielly, CFA, and Michael Preisano, CFA, the average cost from cash drag on large-cap stock mutual funds over a ten-year time horizon was 0.83% per year. It may not be a direct fee, but it’s a cost that takes away from your performance.
  6. Redemption Fee. If you want to sell your fund position, you may pay a redemption fee. This fee is paid to the fund company directly and the US Securities and Exchange Commission (SEC) limits the redemption fee to 2%. Like the world’s most expensive ATM, it could cost you $2,000 to get back your $100,000!
  7. Exchange Fee. Some funds charge a fee to move or exchange from one fund to another within the same family of funds. 
  8. Account Fee. Some funds charge a maintenance fee just to have an account.
  9. Purchase Fee. A purchase fee, not to be confused with a front-end sales load (commission), is a charge to purchase the fund that goes directly to the fund company.
  10. Sales Charge (Load) or Deferred Sales Charge. This charge, typically paid to a broker, either comes out when you purchase the fund (so a smaller amount of your initial deposit is used to buy shares in the fund) or you pay the charge when you exit the fund and redeem your shares.
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