Tip to investors: buyers beware! Financial products generally have associated fees extracted from the fund regardless of the fund’s gains or losses. Most financial products are subject to some form of taxation or cause-correlated taxation on another item. Many investments are touted as inflation hedges, to beat the rising cost of living. But bottom line, the net take-home, spendable money is far less than advertised.
When you’re a baby boomer living in an affluent ZIP code, you’re going to be invited to a free steak dinner to hear the financial advice of an “expert.” Inevitably, an Ibbotson mountain chart displaying the last 100 years is projected on a screen, followed by Morningstar’s top performing mutual funds and ETFs1. The fund performance is the centerpiece of the presentation, just like my steak is surround by potatoes and veggies. At the end of the evening’s “informational” event, several prospectuses are distributed among the seminar attendees with special emphasis on the fund’s low-expense ratio, generally touted as one of the lowest charges among the thousands of mutual funds and ETFs available for purchase. During the Q&A session, some brave soul slips up his hand and asks, “What’s the fund’s Statement of Additional Information (SAI) report charges?” The “expert” not only didn’t know the answer, but also didn’t know what the SAI report was. The man promptly took to his laptop to perform a quick search and found the fund’s SAI report with the additional charges. While the fund’s prospectus declared 90 basis points, the fund’s SAI report displayed an additional 144 basis points i.e., a total of 2.34 percent. This didn’t include the fund’s cash drag (83 basis points) and taxes (100 basis points) in a non-qualified scenario. So you could be paying more than 4 percent just for the honor of ownership.
Keep in mind high turnover in the buying and selling inside a mutual fund could translate into higher fees and possibly ordinary tax rates instead of lower capital gains. If fact at the end of January, some fund owners could be reading about the year’s losses and a week later receive a 1099 for profits generated in trade transactions. If the mutual fund or ETF costs nullify any gains, the purpose of owning an asset to beat inflation may lose the purchasing power of the consumer dollar.
Watch the video interview with popular platform speaker, author, retirement software developer and adjunct professor at the American College, Curtis Cloke, talk about the economic erosion of our retirement by financial product charges, taxation and inflation. As my high school accounting teacher once said, “The only Latin you need to know in life is ‘caveat emptor’ (buyer beware).”
1 Morningstar Mutual Fund Expense Ratio Trends June 2014
Syndicated financial columnist Steve Savant interviews popular platform speaker, best selling author and adjunct professor Curtis Cloke. Curtis is also a leading retirement software developer and has been ranked as one of the top advisers in the country.