Investors Often Underestimate Mutual Funds’ Annual Fees by 50%
Regulations striving for full disclosure are bringing light to impactful fees often missing from prospectuses. The burden of knowledge is with the investor in order to overcome representatives’ miscommunications or obscure product literature. Watch the interview with investment adviser representative Rodger Sprouse.
Investors holding mutual funds in taxable accounts for the sake of diversity are often – and surprisingly – left holding the bag on unanticipated fees and taxable events that can compromise returns.
While many assume that total fees are roughly 1%, the total may be much higher when lesser-known fees are included. The “average” statement of addition information disclosure costs maybe as high as 1.44%. Cash drag could account for an additional .83% and taxes for non-qualified monies at may be near 1%. Registered investment adviser fees can also average around 1%.
Although investors can’t necessarily remedy or reverse these expenses, they can become more knowledgeable before purchasing a fund. One way is to call the fund owner and ask for the fund’s “Statement of Additional Information,” which is broader than a ubiquitous prospectus. Another resource is a forbes.com article titled, “The Real Cost of Owning a Mutual Fund,” which provides further detail on various expenses, and warns of yet an additional potential expense when a fund is bought through an investment adviser.
Alternative investment and tax management strategies can alleviate some of the tax burden that can come with owning funds. There also remains a possibility of paying taxes on gains within a fund that experiences a losing year overall. A retirement adviser can provide investment alternatives that produce tax-free income, but are not exclusive of fees, make no mistake. Similarly, an adviser or tax preparer – with sufficient notice that often begins in late summer or early fall – can identify assets offsetting gains and loses through end of the year tax harvesting.
Despite a full sea of financial mouse print, it behooves investors to seek information from sources besides funds’ representatives to gain a full grasp of mutual fund ownership expenses.
Syndicated financial columnist Steve Savant interviews Investment Adviser Representative Rodger Sprouse on Retirement Expectations. Right on the Money is a weekly financial talk show for consumers, distributed as video press releases to 280 media outlets and social media networks nationwide.