What are the Hidden Mutual Fund Fee’s that are Costing you $1,000’s of Dollars

 

Speaker: For well over 10 years now, I’ve been trying to warn people about the hidden fees inside mutual funds. Now you have big superstar personalities out there encouraging you to get into mutual funds. I’m going to do another video down the road, explaining why that is and what conflict of interests lie within that industry. For now, I just want to focus on what those fees are, so you can understand what you need to look for in order to make sure you’re not paying thousands of dollars potentially per year, depending on how much you have invested in these funds, and over the course of time, we’re talking tens of thousands of dollars.

Very important video here. We’re going to look at three popular mutual fund families. We’re just going to go through an itemization of those funds. I’m not going to point out which particular funds these are simply because someone may be watching this video in two years or three years or five years, and we’re just looking at last year’s data, 2021’s data. Things can change, mutual funds can make adjustments, but I want you to understand how the mutual fund industry operates and why for years, we’ve told people investing in index funds or ETFs can oftentimes be a much more efficient and also cost-effective way to get broad diversification to the overall market.
Most of you are probably familiar with a fund’s expense ratio.

This is the information that’s very easy to find online. If you type in mutual fund expenses, or if you’re looking at a particular mutual fund, and you go to Yahoo Finance, or maybe Morningstar or Fidelity, and you’ll see that expense ratio. Then I’d say from my experience, probably 99% of people, they think that that is all-encompassing of the fees and costs that they will incur with that mutual fund. The truth is far more severe, meaning there’s far more expenses typically inside these mutual funds than just that expense ratio.

The expense ratio is essentially the fund operating cost. We have here, the expense ratio, 0.76, and we have what the expense ratio is broken down here. For fund administration, advisory fees, this is the money that goes to the investment management team managing the buy sale decisions within that mutual fund. Then we have these uncategorized fund management fees here, 0.198, 0.52, and 0.03, they all add up for the expense ratio. If you go to Morningstar, if you go to Fidelity or Yahoo Finance, and you look up a mutual fund, and you find the expense ratio, this is typically what you’re going to find, or this is the information you’re going to find.

Oftentimes what you won’t find is the amount paid for fund distribution. Fund distribution, another name for that is a 12b-1 fee. Essentially these are marketing costs paid to distributors to distribute the fund. There are wholesalers within the mutual fund industry, and they go to firms like us and other firms across the country. They give us their sales pitch on why their mutual funds are the best. They get paid for doing that, and that money that they get paid comes from you, the shareholder of the mutual fund.

Then a big one oftentimes is transaction costs. Every time that mutual fund manager buys or sells a stock or a bond inside that mutual fund, it creates a transaction cost, a commission. What you want to do when you’re looking at your mutual funds is try to identify the turnover percentage. The smaller the turnover percentage, the less buying, and selling is taking place, and therefore you’ll have smaller transaction costs. Now, if you wanted to actually calculate this yourself, it’s very difficult to calculate.

Then we have taxes paid. Transaction costs here, 0.38, but taxes paid for holding the fund 1.17. A couple of caveats here. If you have this fund inside your retirement account, you will not have to pay these taxes paid annually. You will have to pay, of course, whenever you take money out of that retirement account, you’ll pay income taxes at your marginal tax rate. If you own mutual funds in non-retirement accounts and let’s say you bought it in January and you still own it December 31st, even though you didn’t sell that mutual fund, you still have to pay your pro rata share of the taxes incurred by that mutual fund from the buying and selling that took place during the year.

Not only will you have to pay a capital gains tax when you sell it, let’s say three years later, you’ll have to pay tax on the gains, which is the difference between what you paid for, any dividends that have increased basis, and then the price you sell it at on the market, the market value. That gain is going to be subject to the capital gains tax rate, which is either 15%, 18.8%, 20%, 23.8%. It could also be zero if your income is below a certain threshold there on the capital gains tax.

It’s important to understand even if you don’t sell your mutual fund, just simply by owning the mutual fund in a non-IRA account, the taxes that are incurred by the mutual fund managers by selling and achieving gains throughout the year is passed on to you. I’ve actually seen a situation before where someone comes in, a prospective client on their own, they purchased a mutual fund, let’s say in September, and that mutual fund pays out a pro-rata share of taxes throughout that whole course of the year.

Even though he did not own that fund prior to September, the taxes that were incurred prior to September, because he’s an owner at the time when those fees are taken out of the fund, he is subject to paying those taxes on the fund. Mutual funds outside of a retirement account, in my opinion, rarely make sense. You have to be very careful about the portfolio turnover percentage, your share of capital gains, and of course, any other transaction costs that may be involved with that mutual fund.

When we add up this total cost of ownership for this mutual fund, whereas you thought if you went and did your research, and you did some due diligence, and you said, “Okay, I’m going to buy this fund, I like the risk-reward profile, I’m comfortable with the mutual fund family, you see, the expense ratio is 0.76,” you could have paid last year up to 2.31. Even if you don’t have it in outside of a retirement account, and you didn’t pay these taxes, you still had to pay the additional share of the funds’ transaction costs, which increases the fee, you thought you were paying by more than 50%.

If you have 50,000, or 20,000, or 500,000, or 1,000,000 in mutual funds with these additional costs, just this transaction cost here alone can increase your fees fairly substantially. Now we have American funds. American funds, multiple billions of dollars they have inside their mutual funds. I just want to point out here that if you’re doing your research, you’ll find that maybe for this particular fund that it has an expense ratio of 0.46. We have no distribution fees here. No 12b-1 fees, but the transaction costs 0.19. Then the taxes paid for the fund, 1.08.

The one-year total cost of ownership 1.73%. If you thought you were paying 0.46%, you could be paying as much as 1.73%. That is a tremendous difference in cost. Now I’m going to do something I’ve never done here before. If you own mutual funds, or you’re a mutual fund investor, we’re going to offer a fee analysis, we’re going to do this for a one-time cost of $250. We will go through, provide you an entire report and itemize what your expense ratios are, what the 12b-1 fees are the potential taxes, and also the fund transaction costs. We’re going to do this for $250.

If you want to have that service performed, you don’t have to move money over, you don’t have to do anything if you don’t want to. This is a transaction that we are offering to help you hopefully save thousands and thousands of dollars over time. Now, for an additional $250, we’re not going to provide investment advice, we’ll help you with asset allocation because that’s a whole different service that we offer. What we are going to do though, for an extra 250, once we’ve done the fee analysis, if you want comparable funds, funds that are very similar to the ones you currently own, but have costs that are much less when we’re all in looking at all potential costs, we’ll provide you a list of those similar funds as well.

You have two options here. One, you can take the fee analysis report for $250. We’ll do all your mutual funds, and you’ll know exactly what you’re paying. If you want us to find alternative funds that are invested in the same types of securities in the same industries or sectors or geographic regions, we’ll provide you a list of similar alternatives at a much lower cost for an additional $250. Now, to take advantage of this offer, you can click on the link in the description down below. Whenever you talk to our scheduler, just simply let them know you’re trying to take advantage of the $250 offer for a fund analysis or fee analysis for your mutual funds.

Now, we’re going to look at the last mutual fund family here, American Century. Again, billions of dollars under management. We’re not singling out what particular funds these are or which particular funds because the concept here is, I want you to understand that you have the expense ratio, which is very common. Most investors if you’re a mutual fund person, you understand the expense ratio, but what most mutual fund investors don’t often understand is the additional costs that come with owning mutual funds.

This particular one has an expense ratio of 0.87, they do have a 12B-1 fee of o.912, an additional transaction cost. This is actually really good for fund transaction costs, 0.03%. That means it’s going to have a very low turnover. Meaning the mutual fund management team isn’t buying and selling throughout the year a ton. The taxes for the fund, 1.32%. This is based on last year. What that tells me, just to give you some insight, we know with the low transaction costs, they’re not doing a ton of buying or selling, but last year they probably had some positions that they had for a while, many years, possibly.

Then they took some big gains. If you’d bought that mutual fund two days before you had to be a shareholder of record to be responsible for those taxes, even though you didn’t own the fund for the five years prior that they had those positions, you would still owe your share of taxes on all those gains that you never got to participate in. In addition, whenever you sold your mutual fund down the road, if there was a gain, you’d have to pay taxes on your individual gain. You’re paying taxes each and every single year on the gains that get passed through to you if it’s held in a non-retirement account. Then when you sell your mutual fund, you also have to pay taxes on your specific gain for that fund.

To summarize the hidden fees inside mutual funds, you have the expense ratio that most of you are familiar with. In addition to that, you often have 12b-1 fees, which are the fees paid for fund distribution. That’s when wholesalers go out and they try to convince people to sell funds to their clients. For example, if someone came to us, that would be a mutual fund wholesaler. If we then decided to sell those funds, they would’ve done their job, they get some type of commission. Those 12b-1 fees are passed through to you. Sometimes they’re in the expense ratio and sometimes they’re not.

Be aware that a 12B-1 fee can be an additional expense that you have to pay for and it’s not going to these brilliant investment managers. It’s going to the salespeople who are out there hitting the streets trying to get firms like ours to sell those mutual funds. You have transaction costs. Transaction costs, whenever a fund buys or sells throughout the year, it generates a commission. All those commissions are added up and then that value is deducted from the fund and it costs you an additional fee. You want to look for mutual funds typically that have lower turnover rates if you want to reduce those costs.

Then finally, if you have your mutual fund in a non-retirement account, you can have taxes due because the buys and sells throughout the year, if it incurs a gain, even if you don’t sell your mutual fund, you can still owe taxes if the mutual fund incurred a gain throughout the course of the year. If you want to take advantage of our hidden fee analysis offer, $250, we’ll provide you a hidden fee report for each and every mutual fund that you own to show you how much you could potentially be saving if you went to lower-cost alternative options.

This could be, for many of you, thousands and thousands of dollars per year, and potentially tens of thousands, if not hundreds of thousands of dollars over the course of time. You would not believe what I’ve seen in this industry. In addition, even if your advisor is a fiduciary, I can’t tell you how many times I’ve seen fiduciary advisors sell mutual funds because that’s what their firm has them sell that have very high fees that are hidden inside mutual funds.

$250 is that offer. It’s a no obligation. You don’t have to move money over. We’re just going to provide you those reports and hopefully, that saves you a lot of money. If you want us to then find an alternative set of similar funds with much lower costs and you want to manage the money yourself, we’re not going to give you advice or do an asset allocation for you, but we will provide you a list of similar funds that are much more inexpensive than what you’re currently invested in. There’s a link down below if you want to take advantage of that offer. We look forward to seeing you soon.