The Heavy Burden of Recurring Investment Expenses and Fees
The heavy burden of recurring investment fees (Part 1 of 2)
Recurring investment costs can significantly impact the long-term value of your retained investment portfolio assets.
Recurring fees, such as asset management fees, 12b-1 marketing fees, and advisory/asset custody fees are charged periodically, as a percent of your investment assets. The relative cost-efficiency of your investment portfolio in the past has greatly influenced whether you have more or fewer assets today. The investment funds that you have retained in your portfolio are net of any annually recurring investment costs and any investment taxes that you have already paid. If your annually recurring investment costs have been excessive in the past, then it is likely that the growth of your personal investment portfolio has already been stunted very dramatically. (See: Pay less to get more)
It may seem odd to need to state this, but your currently retained investment assets are YOUR assets. You should only compensate advisors for delivering superior investment management results compared to what you could have achieved with a very low cost passive index fund investment strategy. Sadly, this is not how the game works.
If you permit it, the financial services industry will assess various percentages for their services against your entire retained investment portfolio assets, through multiple types of recurring charges each and every year. Whether the value of your assets increases or declines in the securities markets has little influence on these fee arrangements. By billing as a percent of your assets, the industry gets paid as long as you still have assets. (See: The investment industry is not your investment partner)
The simple fact that you do have some investment portfolio assets enables the securities industry to assess annual investment fees. As long as the industry’s annual fees are less than 100% of your investment returns, it is at least possible for the nominal value of your investment funds to increase. (Whether the non-inflationary or real dollar value of your assets will increase, after fees, taxes, and inflation are taken into account, is an additional consideration.)
Obviously, any rational investor would rebel at confiscatory charges that approach 100% of their annual returns – with or without inflation. However, the average investor typically pays in total between 2% and 3% of his portfolio assets in total investment expenses each and every year. Because total investment fees charged across the industry keep growing, it seems that the average investor pays these recurring fees willingly, if not either naively or grudgingly. (See: Excessive investment costs are a huge problem for individual investors)
Even though typical annually recurring investment fees are less than average historical returns, 2% to 3% of portfolio assets yearly for total investment expenses will consume a very substantial part of gross market returns. In effect, in an average year the industry’s investment charges allow individual investors’ net portfolio values to appreciate modestly. Your gross returns are trimmed significantly by excessive fees. Typically, investors lose between 1/3 and 2/3 of their gross investment returns every year. These fees hobble, but do not fatally wound all these golden retail investor geese. (See: What have average investment asset class risk premiums been over long periods?)
Tags: investment returns
Personal Financial Planning
- Fund Authority Scores for Stock ETFs and Mutual Funds – Fund maturity and operating efficiency (
Fund Authority Scores rate mutual funds and ETFs on the most important economic factors affecting long term diversified stock or equity investment fund performance. This article explains the investment fund maturity and operating efficiency factors.
<<-- Go to Part 2
Parts 1 and 2 of this article discussed the first three, most heavily weighted factors used in [...])
- Financial Planner and Investment Advisor Compensation Paid by Third Parties (There are three primary types of third party or commission-based compensation: commission-only, fee-based commission, and fee-offset commission.
How an advisor is compensated can be a very important issue. With commission-only advisors, there is no direct cost to the client for planning and advice. The advice appears to be free, but it is not. Most clients find [...])
- American Funds – Washington Mutual Investors Fund – Class A Shares (AWSHX) acquire a +2 Fund Authority Score (Fund Authority Scores rate mutual funds and exchange traded funds (ETFs) on the most important economic factors that influence individual investors' net long term diversified investment fund performance. The Skilled Investor developed the Fund Authority Score system to provide individual investors with concise and objective summaries of mutual funds and ETFs for comparisons within investment [...])
- Automated Tool Aligns Your Investment Risk Tolerance and Asset Allocation (Check out this automated tool for aligning your investment risk tolerance and asset allocation - A Tip from The Skilled Investor
Your tolerance for investment risk is a relative thing. Few people like investment risk, but some can handle it better than others can. The more investment risk you are willing to tolerate, the higher your [...])
- Avoid High Turnover Mutual Funds and Active ETF Trading (Avoid investment funds with higher investment portfolio turnover
The problem with high turnover is that higher fund trading adds substantial hidden expenses that drag down returns.
Because short-term trading is a zero sum game (before costs) played against other well informed traders, greater turnover is far more likely on average to result in lower fund returns instead [...])
- The most effective strategy to increase your mutual fund and ETF investment returns (
What is the most effective strategy you have to increase your long-term mutual fund and ETF investment returns?
Just reduce your investment fees to rock bottom and buy directly to eliminate all sales loads. This strategy is both simple and entirely within your control. You do not have to be smarter than all those other smart [...])
- A Financial Decision Tool That Becomes Increasingly Valuable Over Time (As a financial decision tool, VeriPlan becomes increasingly valuable with the passage of time
Summary: While VeriPlan is an genuine bargain because of its low cost, it is an even greater bargain, when you consider that VeriPlan has no built-in obsolescence and that it can be used productively for years. We have engineered VeriPlan, so that [...])
- Vanguard Total Stock Market Index Fund (VTSMX) achieves a +9 Fund Authority Score (
The diversified investment fund strategy of the Vanguard Total Stock Market Index Fund
According to the Vanguard website, the investment strategy of the Vanguard Total Stock Market Index mutual fund is to use a "passive management—or indexing—investment approach designed to track the performance of the MSCI® US Broad Market Index, which represents 99.5% or more of [...])
- Screening Index Mutual Funds with IndexUniverse.com (Screening index mutual funds on-line with IndexUniverse.com
In this article, The Skilled Investor discusses how to screen index mutual funds on-line. This article focuses on using the free index mutual fund screener and database available at IndexUniverse.com.
We also discuss how to apply our seven scientifically based mutual fund screening criteria.
In a previous article, The Skilled Investor [...])
- No Financial Planning Software or Calculator Can Predict the Future – Part 2 (No financial planning software and no investment growth calculator can predict the future - Part 2
The future in not predictable, even with automated financial planning software.
The future is fundamentally not predictable. The future of personal financial planning and investing is similarly unpredictable. The Skilled Investor's approach with VeriPlan is different. As a lifetime financial planning [...])
- How to Lie with Statistics – Investment Performance Charts (How to lie with statistics: Investment performance charts - A Tip from The Skilled Investor
Darrell Huff wrote a short and very informative book, "How to Lie with Statistics," which was first published in 1954 and was amusingly illustrated by Irving Geis. This book is still in print and remains very popular (Amazon book rank #2,040 [...])
- Chance creates the illusion that individual investors can beat the stock market (
"Market efficiency" makes it very difficult for individual investors to "beat the market."
Making their own decisions, individual investors perform so poorly that on average their investment returns lag behind the returns that one would expect from random stock selection.
The average professional trader does somewhat better than amateurs do, and professionals probably do so, in part, [...])
- How to distinguish between true investment skill and luck (
Even if an investor has obtained superior results over an extended period, is this sufficient proof that these investment results were actually due to skill rather than just a lucky streak?
No, these investment results could still be due to chance. For example, take a large population, such as all individual investors in the U.S., and [...])
- If Personal Finance is Difficult – Carefully Hire a Good Advisor (
If personal finance is difficult for you, carefully hire a good financial and investment adviser
A previous financial article, “The Solution - ONLY follow financial strategies that are scientific, passive, diversified, savings focused, risk controlled, low cost, and tax efficient,” suggested that investors are much better off with a well-considered financial plan. A stable set of [...])
- Vantagepoint 500 Stock Index mutual fund Class II Shares (VPSKX) rate a +9 Fund Authority Score (Here is some really good news for you. The Skilled Investor has published an article about lower cost S&P 500 index mutual funds that you can read, entitled: Low Cost S&P 500 Index Mutual Funds. The Standard & Poors 500 stock index is the most common equity index fund benchmark in the U.S. The S [...])
Comments are closed.