Monday, January 14, 2008

Edelman on Mutual Fund Fees, Book Review Part 4

This is the fourth part of a review of Ric Edelman’s audio book “No-Nonsense System for Building Wealth.” This review began here.

Mutual funds charge various fees that reduce investor returns. Some of these fees are paid to investment advisors for bringing business to the mutual fund. Edelman claims that fees are the least important thing to worry about when choosing mutual funds, and that “all of the academic data show that there is no correlation between performance and fees.”

I had to pause the audio program there and think about that one. The main components of mutual fund fees are the MER that is paid each year and any loads that are paid when entering or exiting a fund. It is true that academic studies show little or no correlation between loads and fund performance. But this actually means no-load funds are better. Why pay loads if they don’t lead to higher returns? As for the yearly MER, academic studies definitely show a correlation between high MERs and lower fund returns. Edelman is wrong when he says that fees are the least important thing to worry about.

An amusing part of the audio program comes when Edelman talks about whether investment fees should be visible to investors. In his experience with his financial planning firm, “we find that when people see the fees they tend to get more fussy about them.” No kidding.

In the final part of this review, we look at long-term care insurance as well as some of the good advice Edelman gives.

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