The Investment Scientist

Beware These 3 Investment Hidden Costs

Posted on: September 2, 2016

Recently, I did a portfolio analysis of a prospective client who has a Wells Fargo “financial advisor.” Here is the result …

Symbol Expense Ratio Load Turnover
CAIBX 0.59% 5.75% 63%
CAPCX 1.66% 1% 89%
FEVCX 1.90% 1% 15%
MIQBX 1.30% 5.25% 29%
OIBIX 0.57% none 111%
WAFMX 2.25% none 34%
WFPAX 1.24% 5.75% 58%

Let me explain …

Load is the initial kickback (coming directly from your account) the fund gives to the broker for directing money to the fund. There are so many no load funds out there, you shouldn’t be paying load. A broker only does that to line his pocket, there is no benefit to you whatsoever.

Expense ratio is what the fund charges every year. As my rule of thumb, any expense ratios higher than 0.5% are too high. Any expense ratios higher than 1% are exorbitant. As you can see, all the fund expense ratios here are either too high or exorbitant! The broker who directed your money to these funds gets to share a portion of the loots ever year. Can you see a conflict here?

Turnover is how often the fund manager churn the investments. The higher the churn rate, the higher the costs to investors. Typically, a 100% turnover translates into about 1.2% in return reduction. As my rule of thumb, any turnover higher than 10% is too high, a turnover higher than 100% is exorbitantly costly!

With this portfolio, you can easily give up 1.5% of return every year to various hidden costs. That does not sound like a lot, but over ten years, you will give up 15%, over twenty years, you will be 30% poorer. All because you thought a broker is a “financial advisor.”

These are hidden costs because a broker is under no legal obligation to disclose and these costs are above and beyond the explicit fee (usually 1%) he or she charges you. For only $100, I can do a portfolio analysis for you to find out all the hidden costs. Schedule a 2nd Opinion Review here.

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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