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IT Costs HOW Much?

When I'm looking at a client's investment portfolio, one of the first things I look at is how much the investment is actually charging my client.  Very little in life is free, and index funds, stocks and bonds are no exception!  Rarely does an investment statement contain obvious indications of what the client is actually paying, so it's important to know what you are looking for.  Here are a couple of key words and definitions, so you can look at your next statement and see what you are paying.

There are three ways that investments make their money for the company:  1) trading commissions, 2) account service fees, and 3) expense ratios.  The first two are usually very easy to identify on your statement.  These are generally itemized and clearly labeled.  The third is where it gets tricky, and of course, this is the one that can cost you the most in the long term.

Expense ratios are a very simple calculation:  fund operating cost divided by average assets.  Each type of fund that a company manages will have its own expense ratio.  Fund operating costs are things like taxes, administration, marketing, investment advisory fees, legal fees, etc.  These are all legitimate expenses.  However, the higher these fees are, the less money you are earning!

When you next look at your statement, see if you can find that expense ratio.  Remember, it's not a commission or service fee, it's going to be a percentage deducted from your total value on a regular basis.  Passively managed funds (like mutual funds or index funds) will have lower expense ratios than small or large cap stocks, which require more active management.

If you'd like a list of current average expense ratios for various types of funds, please send me an email.  I'll be out of the office the first week of July, but you'll hear from me shortly after that.