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Cost Disclosures and Expense Ratios?

A few years ago, I believe it was passed into law that financial firms had to be more transparent about the fees and costs associated with their investments to the everyday investor and I believe as of this date they have to meet this law's criteria.

As much as I'd like to say that the law achieved what it set out to accomplish, I can't because it honestly doesn't seem all that different than from what it used to be. Am I wrong in this respect? While Vanguard & Fidelity are great stating their expense ratio, 12b-1 fees, & management fees, I've never seen a year end statement saying "This is what we took out for fees". Do the brokerages do this? I've searched both firms' websites in vain for some kind of statement (and I know that the cost is always the expense ratio x every $1000)

Speaking of fees, when are those taken out? 12/31? I've never actually seen a transaction record of it. Is it based on your value in that fund at 12/31 or some kind of weighted average? Is the fee calculation even based on the value or my investment in it (I presume the value but I'm not sure)? If I cash out of the fund, is the fee prorated for the days in the year I was in it?

Feb 06, 2014 by Colin from Oak Creek, WI in  |  Flag
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4 votes

Mutual Fund fees are transparent enough to just satisfy legal requirements. Much of the time it will be up to you to do the research via the fund company's website, Morningstar, or the prospectus.

I would suggest that you stick with no-load index funds or ETF's. These are truly transparent and very low cost to own.

If you've got the time, inclination, and skill to manage a portfolio yourself these are great. Otherwise, find a fee-based advisor to manage a portfolio of no-load funds or ETF's.

1 Comment   |  Flag   |  Feb 07, 2014 from Canton, GA
Alexander Bernd Overkamp

Good points. I think one concept not discussed in any of the answers is that there is a difference between cost and value. Cost is what you pay and value is what you get. If you own a large cap blend mutual fund that beats the SP500 by 1/2% each year but costs 1% more than an SP500 ETF then clearly the value is not there. I think there are areas where active management can be a valuable expenditure, such as in the high yield arena where you are essentially lending money to 'junky" companies. If you buy a low cost ETF there is no research on which companies you are lending to. I think this is one area where there may be some value in the additional cost of active management. William did touch on using an Advisor, and research shows that although indexes have beaten the active managed mutual funds, Investors who use Financial Advisors have had better performance then individuals who have managed their own accounts. This is simple in that the crowds oftne times do the wrong thing at the wrong time i.e.: buy tech stocks in january of 2000!

Flag |  Feb 21, 2014 near Danbury, CT

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3 votes

Great question Colin. Yes, the law was supposed to make costs/fees more transparent. Of course, many financial institutions (especially those with higher costs) do not go out of their way in disclosing fees and keep them somewhat tucked away.

Mutual fund expense ratios are not deducted on your statement but are calculated daily in the fund's NAV (Net asset value or price per share). The annual expense ratio that we see disclosed is broken down daily and again reflected in that daily NAV. The NAV goes many decimal places and therefore in the 2 decimal places (to the penny) the fees do not make a dent on a daily basis. So for your last question of proration, yes, the fees are prorated each day so timing of getting in or out of a fund is not an important consideration.

It sounds as though you are very cognizant of costs and fees of investments and I certainly commend you for that since it is such an important component of your investments.

1 Comment   |  Flag   |  Feb 06, 2014 from Harrisburg, PA
Colin

Thanks Tracy...I have alot of free time on my hands, a sizeable portfolio, and about 30 years to retirement, so I like being cognizant of the fees that will eat into my future mai tai fund!

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Flag |  Feb 06, 2014 near Oak Creek, WI

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Andy Tilp, CFP® Level 16

Colin, If you look up a fund on Morningstar, under the Performance tab, there is a selection for Total Return and for Investor Returns. This shows the difference between what the fund returned with and without management fees.

For example, looking at the Vanguard Wellesley Income Adm. fund, the 10 year total return is 7.16% and the investor return is 7.15%. Vanguard is known for their low fees, so I do not think this small the spread is the norm.

(This is not a solicitation or recommendation to buy or sell this fund. Work with your own advisor prior to any changes to your portfolio. I am in no way associated with Vanguard, this is just a sample fund I happened to pick.)

Hope this helps Andy

Comment   |  Flag   |  Feb 06, 2014 from Sherwood, OR

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