By Lyman Howard
Learn more about Lyman on NerdWallet’s Ask an Advisor
Many investors have no idea what it is exactly they own in their account. This is particularly true when it comes to mutual funds, since the portfolio holdings are constantly changing. They might not know what they are paying in fees to own these funds, either. Unsuspecting investors might be paying fund companies and their broker thousands of dollars more than they have to.
Costs vary widely just across different share classes of the same fund, adding up to hundreds of dollars per year for each $10,000 invested in the very same investment portfolio. The costs are a result of different combinations of these mutual fund features:
- front loads – one time sales charges to compensate your broker at purchase
- back loads or contingent deferred loads – sales charges incurred when you sell the fund, phased out over years of ownership
- size discounts – many fees are waived with a high enough initial investment
- management fees – these compensate the funds’ managers and cover internal portfolio costs, assessed as an annual percentage of the amount you have invested
- trading costs – ETFs and some no-load funds have trading commissions like stocks
The exact combination of fees varies depending on who sells the fund:
- fee based advisor/planner
- discount brokerage firm
- 529 plan, or 401k plan at work
- mutual fund company
- insurance company
- bank or full-service brokerage firm
- fee only investment advisor
A good example of a particular mutual fund is Pimco’s Total Return bond fund. There are 20 different ways to invest in this flagship mutual fund, according to Morningstar.com. Here are four classes, “A”, “B”, “C”, and Institutional, which are common types of share classes found in other mutual fund families:
|Fund||Front Load||Mgmt Fee||Back Load||Min Investment|
|Share Class A (PTTAX)||3.75%||0.85%||–||$1,000|
|Share Class B (PTTBX)||–||1.60%||3.50% 7 year phaseout||$1,000|
|Share Class C (PTTCX)||–||1.60%||1.00% 1 year phaseout||$1,000|
|Institutional Share Class (PTTRX)||–||0.46%||–||$1,000,000|
|Exchange Traded Fund (ETF) equivalent (BOND)||–||0.55%||–||None (buy/sell commissions do apply)|
So how does this relate to you? If you buy directly from a mutual fund company, discount broker or via your employer retirement plan, you will likely be offered a no-load “retail” or “institutional” class, and never see an “A”, “B”, or “C” designation. If you buy a fund at a brokerage firm or fee based (not fee only) advisor, expect to see in many cases that A or B, possibly C class. A fee only advisor will likely be able to buy for you the Institutional Share Class even in amounts smaller than the stated initial minimum, depending on their custodian relationship.
The best way to determine what you own is to check your account statement or ask your broker. You can visit Morningstar.com to look up the ticker and read about that fee structure. Be sure to investigate if your fund has a comparable ETF, too. The savings of a different share class could really add up. According to Morningstar.com, the 3 year cost of ownership for every $10,000 invested in the PIMCO Total Return Fund is $148 for the institutional share class (PTTRX) versus $705 for the B shares (PTTBX)!
Consider the ways you might be paying/compensating for financial services today. With all of the potential layers and contingencies, are you actually getting something for your money? Remember that you might be able to pay the same total amount out of pocket each year but get a totally different level of service. Consider that fee only investment advisor will charge an advisory fee, but might save you enough in investment costs to make up for it, and then some. In any case, shouldn’t all of the costs be out in the open?