When you visit your "investment adviser" you may wonder how he makes a living. Who pays his salary? Who pays his secretary? Who pays for that fancy oak desk and the marble floors? Who pays for his new Acura in the parking lot?
Of course the answer is: You do. But it is never made really clear how the money comes out of your pocket and ends up in his. There are two ways, basically - well, perhaps three. One is "loads" that many funds charge to invest in. Most folks suggest investing in "no load" funds, as they are far less costly. The second is in "expense ratios" - the amount taken out by the fund every year to pay expenses. A third is in trading fees (for stocks) and other fees some companies charge (account closing fees, transfer fees, etc.).
"Fund managers charge management fees, which are generally pretty small, often less than 1.5% of the money you invest. This small percentage, however, is enough to be profitable for the fund company, since so many people are investing so much money"This link has a definition of expense Ratios. These are annual fees taken out of your account, and can vary from tiny fractions of a percent to over 1%. Sadly, these annual fees are rarely itemized - if ever - on your monthly, quarterly, or annual statements.
In an era of 3% rates of return, 1.5% is a pretty big deal. It also explains why many investment advisers want you to sell your mutual fund with company X and buy one with their company Y. They might get money this way.
Fees & ExpensesFront load 0.00%Deferred load 0.00%Max. redemption fee 0.00%Total expense ratio 0.00
That is not a bad ratio. But what about equivalent funds from Fidelity? Morningstar (whose stock has done very well, by the way) rates VASIX as a "Conservative Allocation" fund. My Fidelity manager has put me into the following funds with the corresponding expense ratios.
FGMNX: 0.45%Note that these latter Fidelity Equity Income Fund was what we were originally invested in, and it had a fairly low (by Fidelity standards) investment ratio.
FLPSX: 0.82% Redemption fee: 1.50% (!!!)
FSCRX: 1.01% Redemption fee: 1.50% (!!!)
YAFFX: 1.26% Max Redemption fee: 2.0% (ouch!)
We previously had a SEP IRA with American Funds (see note above) with the following expense ratios:
AEPGX: 0.84% 5.75% Front Load
AGTHX: 0.66% 5.75% Front Load
ANEFX: 0.83% 5.75% Front Load
ANWPX: 0.79% 5.75% Front Load
SMCWX: 1.13% 5.75% Front Load
AWSHX: 0.60% 5.75% Front Load
AHITX: 0.66% 3.75% Front Load
ABNDX: 0.61% 3.75% Front Load
Of course, you could buy stocks directly yourself and just hold them. However, as I noted before, stock-picking is fraught with peril. You can make millions or lose it all - depending on what you pick. And few of us have the wherewithal to research and select stocks and beat the market. In a future posting, I am going to analyze my own stock portfolio and see what my overall rate of return has been (including dividends) and compare it to the market averages. But aside from the risk (which is also present in mutual funds) is the trading fees, which usually are about $7 to $9 a trade with most shops, which means that you will pay an awful lot, as a small investor, if you are only buying a few thousand dollars of stock at at time (as compared to the large investor).
And this is what Fidelity gets for changing its website. I probably never would have researched this, until they got me thinking about it. 1.26% pays for a lot of HTML programmers - ones that I don't want to pay for! And how much did I pay Fidelity? That is an interesting question. Based on all the assets we have with them, as well as the expense ratios, you are looking at about $4000 to $6500 annually, I believe. Bear in mind that each dollar reinvested has its own nick of the "expense ratio" as well.
Granted, using expense ratios is not always the best way to choose a mutual fund! A fund that is losing money is no bargain. A fund with a high ratio can be great - if it makes a lot of money. However, this link discusses which funds have the lowest fees. Vanguard tops the list.
NOTE: Different types of accounts may be better or worse off at different investment houses. For Trading accounts, where you are buying and selling stocks, you might want to go to an account where the trading costs are low or free. For a mutual fund account, you might want to go to an account where the funds have a low expense ratio. I think I may switch to Vanguard for mutual funds as they have lower annual expense ratios, which means less money out of my pocket.