Fees Matter … A Lot!Fees really do matter—a lot. As an investor focused on controlling investment expenses, you must consider both the costs that come with the type of investment you choose such as mutual funds as well as your advisor’s fee structure. It is common for investors to pay financial advisors as much as 2% or more in annual fees. That’s on top of the average mutual fund expense of approximately 1.2% annually. Thus, it is not unusual to have investors pay a total of 3% or more in annual fees! In our current environment where low interest rates and relatively low expected returns are the norm, we believe that helping investors control costs is more important than ever. Let’s look at the real impact of fees and consider how True North’s approach is refreshingly different.
What is the real impact of fees on a portfolio? In 2013, the University of Chicago’s Center for Research in Security Prices published its annual “Mutual Fund Landscape” study, analyzing the correlation between investment costs and mutual fund performance over a 10-year period ending December 31, 2012. The study found that medium-high or high expense ratio mutual funds beat the market 19% and 12% of the time, respectively, over five years. A review of those same two fund categories over the 10-year period revealed that the medium-high expense funds beat the market 14% of the time while the high expense funds beat the market only 10% of the time. This study consistently showed that the higher the fees, the worse the performance.
Let’s look at what this means in terms of dollars and cents. If, for example, you invested $100,000 in a mutual fund that earned 6.5% over 30 years and your total expense for the mutual fund and advisor fees were 1%, you would accumulate $498,395 in your account before taxes. However, the results would change drastically if your fees were higher. If, like the average mutual fund investor, you had to pay at least 1% for the mutual fund plus another 1% for advisor fees, the total expenses over 30 years will cost you $123,764! With that fee structure, your balance would be reduced to $374,631. Other investment vehicles such as hedge funds can charge 2% per year plus a performance bonus of 20% of the profits in the fund. This type of pay-out formula can result in 4% to 5% annual fees when the performance bonus is achieved.
With True North, you don’t have to worry about paying a fee based on a percentage of your assets under management. Our fee schedule is based on a retainer for the time needed to manage the account based on the complexity of the portfolio. We offer low-cost, flat fees for services, starting at $1000 per year, and you know what you are paying for the year in advance. Why should an advisor charge clients more because the market works, increasing the value of their account?
As part of our commitment to deliver first-rate advisory services at a low cost, we use mutual funds and exchange-traded funds in our ClearPath Investing services. Our mutual fund portfolios are primarily comprised of research-based Dimensional Funds (DFA). With DFA funds and our typical portfolio allocation strategy, we are able to keep our expense ratio average between 0.35 %and 0.45% including both mutual funds cost and advisor fees. This fee structure is significantly less than the average mutual fund expense. As a result of our lower fees, you will be able to keep more of your own money, putting it to work for your family’s financial future.