Avoiding a Mountain of Fees

Steve Zeller | November 15, 2016

“In every walk with nature one receives far more than he seeks.” – John Muir

During the summer months, enjoying the beautiful weather, my thoughts often drift to the mountains. Hiking is my passion and I plan on doing a lot more of it once I retire from my position with Avier Wealth Advisors. I’m currently 57 years old and retirement is getting closer with every passing year. I’ve saved diligently, monitored my family’s spending, and tried to invest wisely in order to achieve my retirement goals.

Many factors help improve an investment portfolio’s profitability. Many investors know it’s important to have a diversified portfolio, reduced risk exposures, and an appropriate asset allocation. However, most investors pay little heed to the expense ratios of the funds in their portfolios. Ignoring a fund’s internal costs could lead to an unfortunate error as higher expenses negatively affect the performance of their assets. Even worse, these effects are amplified over extended periods of time. This could result in having to work longer than anticipated before being able to retire.

Understanding why mutual fund expense ratios vary can be confusing to the typical investor. As a rule of thumb, investors should not pay more than 1% for an equity fund, and usually should pay much less. A mutual fund’s total expense ratio is based on numerous factors including the fund’s management fee, operating expenses, and in some cases, a 12b-1 fee. A 12b-1 fee is generally used for the marketing and advertising of the fund, and if possible, should be avoided.

All mutual funds and exchange-traded funds (ETFs) charge their shareholders an expense ratio to cover the fund’s total annual operating expenses. Expressed as a percentage of a fund’s average net assets, the expense ratio can include various operational costs such as administrative, compliance, distribution, management, marketing, record-keeping fees, and other costs. The expense ratio, which is calculated annually and disclosed in the fund’s prospectus and shareholder reports, directly reduces the fund’s returns to its shareholders, and, therefore, the value of your investment.

The good news is that there has been a trend to lower expense ratios over the years. Recently i-Shares announced that they were lowering their internal expenses to beat those of their competitor Vanguard. Competition, spurred on by smart investors, continues to move fees within the industry as a whole downward.

At Avier, our Investment Committee is constantly looking at ways to increase the returns of your portfolio. A key component in this process is staying ever-vigilant in regards to fund expenses. Our firm has access to institutional funds which are not usually available to individual investors. These institutional share classes save our clients as much as .5% compared to purchasing non-institutional share classes of the same underlying mutual fund.  Research has borne out that the most important factor in determining future relative performance is cost. The more you pay a fund manager, the less you receive in investment returns. There’s no such thing as a free lunch; however, you don’t want to pay for a steak dinner if all you receive is a hamburger.

No one wants to be forced to work longer than they have to. A key component to long-term investment returns is managing costs. Reducing your investment fees and expenses may well allow you to retire years sooner than you could otherwise, and that’s why it is so important to pay attention to expense ratios.

I hope to see you outdoors on a trail. The only traffic jams I want in my life are passing others on my way up the mountain.