The “Phantom Fee” Phenomenon
Life would be much simpler if we received a bill for all the charges that mutual funds levy against our investment progress. But, they don’t. Unfortunately, the Securities and Exchange Commission, (SEC), and the Financial Industry Regulatory Authority, (FINRA), do not require mutual fund issuers to list the several costs that can be considered as “hidden mutual fund fees” (or “Phantom Feeds) that investors pay on an ongoing basis. The total financial impact of these “hidden costs” is estimated to be approximately 4% annually! This is exactly why we at Indicator Advisory Corporation do not place mutual funds within client portfolios. (You can read more about our money management process.)
Since 1986, we have sought to minimize investment costs for our clients. We realized early on that cost savings resulted in better investment returns for our investors. Our book entitled, “The Wall Street Casino” documented the unreasonable hidden fees that exist in all “retail” mutual funds and even in the often claimed “institutional quality funds” that some money managers employ in their “fund of funds” strategies.
The “Hidden Fees”
The list below includes “hidden fees” not listed in the prospectus of many mutual funds. These are fees are what you pay in addition to the “Expense Ratio”, which averages 1-2%, (that is mentioned in the prospectus) along with the “sales loads”, (commission), paid to the selling broker. These “loads” total 4.25%-10% upfront…or at the time you sell the fund. Also included are 12-b1 fees, which are paid each year and can be as high as 25/100% yearly. That totals $250 yearly on a $100,000 fund investment and $2,500 over a ten-year holding period! It is not what you earn…it is what you keep!
The following are some common, Hidden Mutual Fund Fees, (“Phantom Fees”) that are not listed in the Prospectuses of many, if not most, mutual funds:
- The internal clearing costs, (internal commissions), from .5 to 1%
- The “spread” between the bid price and the asking price for securities can total 1.00-3.25%
- The mutual fund holding cash results in a 1.25% drag on annual performance.
- The “bid-asked” spread on every trade adds another 23/100% annually
- “Market Impact” reduces a stock’s price when large stock positions are sold=96/100%
- Unearned Capital Gains Taxes: An estimated 1% annual cost occurs when shares are sold and all shareholders are burdened with the capital gains tax. You may even inherit the tax with your initial purchase!
The above are just some of the reasons why investors are seeking alternative investments to mutual funds. This should arm you with information that many investors are not aware of as they evaluate various investment opportunities. We believe that providing investors with a complete background of financial data achieves a higher level of success as well as mutual trust.
We would welcome the opportunity to address whatever questions you may have about financial performance and investments. Please feel free to contact us to schedule a private interview to address your unique needs. Call Indicator Advisory Corporation in Toledo Ohio at (419) 726-9000 .