It should go without saying that the financial world survives on the fees that investors and consumers pay related to their accounts. Fees are not a bad thing, but today there is more and more press about the “fee drag” and how it can stifle a portfolio over many years.
The challenge is that the fee world is so complex that it is nearly impossible to calculate exactly what fees that one pays in the various investments that they hold. Some say that the marketplace wants it like that – to keep consumers in the dark, not understanding all the various fees that they are paying each month or quarter. On the surface, in a basic asset management arrangement, there is a percentage of the “assets under management” that one pays for the services provided by the manager. However, behind those fees can be additional layers of fees in the mutual funds held, transaction fees, yearly account maintenance fees, and others, which, when added up, can equate to a sizeable number. Take that out over 20 plus years, and the drag on performance is noteworthy.
In the annuity world, the fee discussion rages on. Some of the variable annuities in the marketplace have fees in excess of 4% per year. It would take a Master’s Degree in mathematics to sort through all of the prospectuses to calculate all of the various ways that the policyholder gets charged. The basic fee structure in both Variable Annuities and Fixed Index Annuities are fairly easy to decipher. It gets more difficult when the policy-owner elects the various “riders” or “add-ons” to the base contract – this is when the “fee drag” takes hold.
One of the most popular mutual fund companies in the world makes a fairly valid claim that it is nearly impossible to find an asset manager that outperforms their S&P Index 500 fund, net of fees. Their fund has an expense ratio of .05%. There have been various studies, easily referenced, which show that nearly 80% of funds with active management do not beat the performance of this fund – which is not actively managed. This is proof that the world of fees drag down performance for most all consumers.
The dirty word today in the financial world is “commission.” That word conjures up visions of the old style stock broker hammering folks on the phone until they buy. The truth is that for many long term investors, they most likely would be better off getting professional advice and purchasing their investments with an upfront commission and being done with the drag of higher ongoing management fees. The jury is continuing to deliberate this, and the volatility in the market will not let the “fee discussion” settle down to the back pages of the financial papers. When markets are up, the fee discussion lessens; when markets are down, the fee discussion heightens.