Understanding the details of your mutual fund can be frustrating. There’s so much information available, it’s difficult to know what’s important. What key data points really impact the cost and investment performance of your fund? One specific type of cost may not be adequately disclosed.
Types of mutual fund costs
There are several types of costs you may pay for owning a mutual fund:
- Sales charge: A cost you pay when you purchase the fund. The sales charges (or sales load) may be assessed when you buy the fund, or when you withdraw funds after purchase.
- Annual expense: Most mutual fund charge an annual expense to cover the day-to-day cost of managing the fund (accounting, legal, money management). This fee is based on a percentage of assets under management.
- 12B-1 fee: Investopedia defines this cost as an annual marketing or distribution fee on a fund. This fee is also based on a percentage of assets under management. A 12B-1 fee can be used to compensate the salesperson for monitoring the fund’s performance and answering client questions.
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The disclosure of mutual fund costs has improved over the years. The easiest way to review your fund’s costs is to download the summary prospectus. Here’s a link to the American Fund’s Washington Mutual page. If you click on “Resources” at the top right, you’ll find the summary prospectus link.
Pressure to pay more fees
The Wall Street Journal points out that SEC is concerned about mutual fund fees that may not be fully disclosed. A large percentage of mutual funds are sold through financial advisors. Those advisors, obviously, want to maximize the compensation they get for selling and managing money in a mutual fund.
The SEC is concerned that mutual funds may be making extra payments to pay advisors for additional services. One such service is the process of consolidating the trading records for an advisor’s clients. If record keeping can be improved, that feature benefits the financial advisor. However, those services should be paid for by the advisor’s firm- not the mutual fund company.
Extra payments, possible conflicts
Regulators are concerned about a fund paying an advisor for these extra services. Those payments may influence the advisor to sell the fund- even though another fund (that doesn’t pay for those costs) is more suitable. FINRA limits the spending on marketing and distribution to .75% of the average net assets of the fund.
Why costs matter
Two costs have a huge impact on your mutual fund’s rate of return: Taxes and fees. While your fund does not need to have the lowest fees in the industry, their costs should be reasonable- when compared with similar funds.
Check your costs, monitor your fund’s return
Make the effort to read your fund’s summary prospectus. Mutual fund websites now offer a lot of great, easy to read information. Morningstar is also a great tool to assess your mutual fund. This service ranks mutual funds against their competition.
Take these steps to manage your investment. While you don’t need to read everything, you can stay informed and make smart investment decisions.
Have you found a fund with reasonable fees? I’d love to hear from you.
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