Wednesday, August 10, 2016

Do You Pay Investing Fees?

Now that phase 2 of the new Client Relationship Model (CRM2) is fully in effect, we have new possible answers to the question “do you pay investing fees?” Here is a list of possible answers to this question in roughly increasing order of investor knowledge, including two that are specific to the CRM2 changes.

No, there are no fees with my mutual funds.

Blissful ignorance.

No, the mutual fund company pays my advisor.

Not thinking it through. Why would the mutual fund company pay your advisor with anything but your own money?

My mutual funds used to be free, but my latest statement has a bunch of new fees.

Not realizing that the fees were always there.

Yes, but it’s just 2% or so.

Not understanding that the fees compound to big money. Might think that the 2% applies just to returns rather than the full amount of your savings every year.

Yes. I thought the fees were small, but my latest statement shows they’re much more than I thought.

Seeing the amount in dollars has much more meaning for most people than percentages. I’d like investors to see the dollar cost of the mutual fund’s entire MER, but showing advisor compensation is a start.

Yes, but you have to spend money to make money.

That’s an expression that applies in many areas, but not investing. All the evidence says that professional money managers very rarely earn excess returns that make up for all the costs investors pay.

Yes, but what choice is there but to pay the high fees?

Understands that fees are high, but isn’t aware of lower cost options.

Yes, but I keep fees to a minimum.

Has found a low cost approach. There are a number of possibilities here:
  • A low cost mutual fund company that offers some advice directly instead of paying commissions to advisors.
  • One of the new breed of advisors who keep costs low.
  • Robo-advisor.
  • Do-it-yourself approach.

I’ve encountered people at each point in this spectrum of answers. Are there any other common answers to this question about fees?


  1. You are a "Investing Whisperer" with these one-liners. Keep up the good work!

  2. MJ, I think you're missing, "Yes, but it's worth it to me", which is a more positive take on "..but you have to spend money to make money". You don't have to, but you can, given your personal circumstances, choose to.
    Case in point, we invest with an advisor who charges an annual % fee, is and has always been very transparent about it, and refunds the trailer fees he receives in the odd instance he invests some of our portfolio in an investment that pays him back. We find it worth it for 2 reasons. The major one is he also does our taxes (for no extra cost), deals with all the tracking/admin needed *and* optimizes what is held in what account, tax-loss selling etc. with tax optimization in mind. The minor one is knows when to go an added level of complexity to save money, e.g. set up a bond ladder vs holding a bond fund, etc. Is it worth it strictly from a $ point of view -- not sure. Am I happy I can engage on fin topics on your blog or elsewhere whenever I want, but don't *need* to pay attention to specific nitty gritty in December and April - you bet.

    1. @Martin: That's not an answer I encounter. I hear many people say they're happy with their advisors, but these people usually either don't know what they pay or they fall into the last camp of those who have found a way to reduce costs.