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Making the most of mutual fund fees

Key to the success of an investment is how much its costs eat into returns. Mutual fund investors must mind the fees they encounter, explains Isabelle Wiemero. They also must understand how some expenses – strategically chosen – can help their portfolio. Isabelle spoke with Joel Dresang. A transcript of their conversation is below.

Joel Dresang: Isabelle, you do a lot of work with mutual funds. Why is it that fees are so important in considering which fund you pick?

Isabelle Wiemero: Looking at fees is so important because the total cost that you pay to be an investor in a fund will have an effect on the total return of that fund. As an investor, it’s really important that we’re mindful of this so that we can manage cost without sacrificing on our investments.

Joel: So what sorts of fees can mutual fund investors expect?

Isabelle: Well, when we’re talking specifically about mutual funds, there are many different fee structures that a fund family can offer to their investors. And taking that a step further, each fund family does it a little differently. It can get pretty complicated pretty quickly, and that’s why this is something that’s best left between you and your advisor to determine which fee structure makes the most sense for you.

Joel: So, are there some fees that are common among funds?

Isabelle: So there’s the administrative costs. Those are the costs of running the fund.

There’s the 12b-1 fees. That’s marketing, and part of it goes back to your broker.

And then there’s the management fee, which goes back to that expert team. And that’s really what you’re paying for in a mutual fund is that team to run the strategy for you, giving you things like best trade executions and shared risk.

Joel: How can investors try to avoid any of those fees?

Isabelle: You can avoid the management part of the fee by going into an indexed fund rather than an actively managed mutual fund. You’re still going to pay something because you need to pay for the annual expenses to run the fund, but it’s typically going to be less than those active-managed funds.

Joel: And you generally don’t advise having just index funds in a portfolio.

Isabelle: Right. When it comes to talking about reducing your cost and potentially using indexes to do that, you want to be careful not to overdo it and consider what it is you’re giving up.

And what you’re giving up is that active management. When you’re going to invest purely in an index, you’re locking your performance into how that index does, for better or for worse.

Joel: What sort of areas would you want to have for active management?

Isabelle: Areas where an expert team backing you up would be more helpful like the bond market or investing overseas or even small- or mid-size companies here domestically that don’t have as much public knowledge out there.

Joel: So when you have an active manager, how do you know that you’re getting the most for the fees that you’re paying?

Isabelle: We put in a lot of time and research here to look and make sure that the funds that we’re investing in, the managers are earning their keep. Whether they’re relatively inexpensive, averagely priced or even a little more than their peers, that’s not the only thing that we want to look at.

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We also want to look at the risks that they’re taking and the performance that they have. So that slightly overpriced fund might actually be performing above its peers, and it might truly be the best investment choice

In any event, we want to be sure that the fees that you’re paying to be an investor are being used in the most effective way possible because the expenses that you pay will have an effect on your total return.

Isabelle Wiemero is an investment advisor at Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Peter May and Jason Scuglik

Learn more

Mutual Fund Fees and Expenses, by the Securities and Exchange Commission
What You Need to Know About Mutual Fund Fees, a podcast by the Financial Industry Regulatory Authority

(initially posted March 15, 2016)

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