Active mutual funds (funds that try to outperform the market) typically charge a fee 1 percent per year. I’ve found many clients paying the standard 1 percent to their manager and are paying another 1 percent to the active funds inside their portfolio – net 2 percent per year. In the most insidious cases, there can be multiple layers of fees can be stacked on top of each other, amounting to Russian doll of charges.
I once reviewed a client statement for an investor that held a “target-date retirement” mutual fund. These are very common funds. In total, there are tens of billions of dollars invested in these types of funds. You may hold one yourself (maybe inside your 401k or IRA). The idea is that the fund will provide an appropriate portfolio allocation for your time horizon so that you can set it and forget it.
In this case, the target-date fund was a “fund of funds.” In other words, the fund was made up of several other active mutual funds. They’re not all structured this way, but in this instance, we found that the client was being charged three levels of fees. The first fee came from the funds inside the target fund, ranging from between 0.25 percent to 1 percent. Then the target fund itself charged its own fee of 1 percent, adding the second level. Then the advisor who recommended the fund to the client was charging his own fee of 1 percent. A total cost to client of at least 2.5 percent annually! This is the equivalent of a financial advisor calling in sick and invoicing you for the notice.
Is your Target-Date mutual fund charging hidden fees? Farnam Financial is pleased to offer a complimentary review of your portfolio to let you know. No strings attached.
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Jonathan Bird, CFP®
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