Fees, more fees and a world of investment

We should not say that the financial world lives on the fees that investors and consumers pay in relation to their accounts. Fees are not a bad thing, but today there is more and more press about “withdrawing fees” and how it can choke a wallet over many years.

The challenge is that the world of fees is so complex that it is almost impossible to calculate exactly the fees one pays for the various investments that they own. Some say the market wants it this way – to keep consumers in the dark, not understanding all the different fees they pay each month or quarter. Ostensibly, in a basic asset management arrangement, there is a percentage of “assets under management” that one pays for services rendered by the manager. However, behind these fees could be additional layers of fees in mutual funds, transaction fees, annual account maintenance fees, and more, which, when added, could equate to a large number. Take this for over 20 years, and the negative impact on performance will be noteworthy.

In the world of annuities, the debate on fees rages. Some variable annuities in the market have fees of more than 4% per year. It would take a Master of Mathematics degree to sort through all the posts to calculate all the different ways in which the policyholder is being charged. The basic fee structure in both variable annuities and fixed index pension payment is fairly easy to understand. It becomes more difficult when the document owner chooses multiple “riders” or “add-ons” to the underlying contract – this is when the “withdrawal fee” takes hold.

One of the world’s most famous mutual fund firms makes a fairly valid claim that it’s nearly impossible to find an asset manager that outperforms the S&P Index 500 fund, the net fee. Their fund has an expense ratio of 0.05%. There have been various studies, easily referenced, that show that roughly 80% of actively managed funds do not outperform this fund – which is not managed effectively. This is evidence that the world of fees underperforms most consumers.

The dirty word today in the financial world is “commission.” This word conjures up visions of an old-fashioned stockbroker who knocks people on the phone until they buy. The truth is that for many long-term investors, it will likely be better for them to seek professional advice and purchase their investment with an upfront commission and this is done with a higher ongoing management fee. The jury continues to debate this, and volatility in the marketplace will not allow the “fee debate” to settle on the back pages of the securities. When markets go up, discussion of fees decreases; When the markets are down, the fees are discussed in more detail.