Paying Retail for Your Mutual Funds
At least once a quarter, a prospective client will tell me that she is receiving advisory services for free because there are never any fees deducted from her account or that the 1-2% in annual fees is so small it just does not matter. This Financial Advisor survey of 1,165 full-time employed Americans between the age of 50 and 68 confirmed that 46% of those surveyed believe that they pay nothing, nada, zilch in fees on their investment accounts.
Given I run into this situation frequently, I realized that just providing the raw analytical data wasn’t enough to get an investor to fully grasp the true cost of high investment fees. I needed a striking visual to prove my point. Hence, the Portfolio Cost Analyzer (PCA) educational tool was born.
Click here to access Flash-based Portfolio Cost Analyzer
Source: Koch Capital
Visualize the Pain
The PCA looks at the three main drivers of portfolio costs - advisor fees, fund fees and transaction costs. Advisor fees are the percentage of portfolio value that you pay annually for the services of an investment advisor. If you are a do-it-yourself investor then you don’t pay any advisor fees.
Fund fees cover the cost of all your internal mutual fund fees, exchange traded fund (ETF) operating expenses, closed-end fund (CEF) fees. You also hear fund fees referred to as the expense ratio. And finally, transaction costs cover the broker commission fee as well as soft transaction costs like bid-ask spread when buying or selling a security.
To see how these three cost buckets impact your overall retirement portfolio, you can start by watching the PCA help video, a three-minute tutorial video of the tool in action. You’ll need a flash-enabled browser to view the video.
Next, if you know the approximate value of your portfolio and its average long-term return and volatility (commonly referred to as “standard deviation”), you can enter those values into the tool directly using this link: Portfolio Cost Analyzer.
Take Control of Your Investment Costs
Please remember that like all models certain assumptions and estimates are used, so this is purely an educational example and not a precise analysis. In addition, the PCA doesn’t include the costs of inflation and taxes, yet another real-life drag on your portfolio returns. Nonetheless, the more you experiment with this tool, the more (I hope) you will come to realize that investment costs really do matter in terms of your long-term financial well-being.
The good news is that managing portfolio costs is one of the few areas in investment management that you can directly control. As a more cost-aware investor you now have a tool to help you better understand the portfolio fees you are currently paying.
Balloons and Free Rides
As a teenager growing up in Arizona, I remember going on my first hot air balloon ride over the Sonoran Desert. As I stepped into the cramped 4x5 tethered gondola, our captain, a family friend with an unrestrained sense of humor, grabbed my arm and pointed to a plaque mounted on the inside wall of the gondola. In very large print the inscription read “ %#s, grass or cash....nobody rides for free.” Whether you’re utilizing the services of a financial professional or enjoying a scenic balloon ride, nobody rides for free.
Thank you for your continued interest........Jim
About Jim Koch
Jim Koch is the Founder and Principal of Koch Capital Management, an independent Registered Investment Advisor (RIA) in the San Francisco Bay Area. He specializes in providing customized financial solutions to advisors, individuals, families, trusts and business entities so they are better able to achieve their goals. Jim sees himself as an "implementer" of financial innovation, using state-of-the-art technology to provide practical investment management and retirement income planning solutions for clients.
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