Mutual Fund Fees and Expenses
By: Suzanne Lako
The Henssler Financial Group Position Paper
By: Suzanne Lako
The Henssler Financial Group Position Paper
In
previous articles, I have outlined the basics of mutual funds, as well as the
different types of funds. In this article, I will outline some of the various
expenses associated with mutual funds.
Mutual
funds incur costs that must be paid from fund assets. These costs are incurred
through marketing, advisory fees, accountants' fees, legal fees, custodial fees,
etc. Simple transactions such as buying, selling and exchanging shares can be
costly for mutual fund companies as well. The investor is the one who inevitably
pays for these costs.
Fees
imposed on the "transaction" are charged directly to the investor as a "load,"
while operating expenses are paid from the fund assets. Therefore, ultimately
the various costs a mutual fund investor incurs come either directly or indirectly
from the investor's pocket.
Listed
below are the major fees associated with mutual funds. These are in no particular
order and can be costs of transactions, or fees charged to make up for normal
operating expenses.
Sales Charge (Load):
This is a fee charged to compensate brokers the fund uses to sell its shares. There are two types of loads, front-end and back-end:
12b-1 Fee:
A fee assessed to shareholders for some of a fund's promotional (marketing and distribution) expenses.
Account Fee:
A fee that some mutual fund companies charge to help maintain shareholder accounts.
Exchange Fee:
A fee charged by some mutual fund companies when a shareholder transfers from one fund to another within the same family of funds.
Management Fee:
A fee that is paid from fund assets to the investment adviser for management of the fund.
Purchase Fee:
A fee charged when shares of a fund are purchased. This is not the same as front-end sales load, because the fee goes to the fund, not the broker.
Redemption Fee:
A fee charged when a shareholder sells shares in a short period of time. The time limit varies among funds. Some funds charge a percentage, and some charge a flat dollar amount. The SEC generally limits this fee.
A note regarding "no-load" mutual funds — these funds are sometimes referred to as "free" funds, since there are no loads associated with them. However, just because a fund is a no-load fund does not mean that it is free. No-load simply means that there are no sales charges or loads as described above under Sales Charges (Loads). In reality, no-load mutual funds are permitted to charge fees such as redemption, exchange, account, and purchase fees. A fund can call itself a no-load fund as long as its 12b-1 fee and/or shareholder fees do not exceed a certain percentage of the fund's average annual net assets.
Share Classifications
As discussed
earlier, when mutual fund shares are purchased through a broker, a sales charge
is usually assessed. This charge is paid differently based on the class of shares
purchased. Below are the three main types of mutual share classifications.
Class A Shares:
Generally, expenses are lower on this share type than on B and C shares. Class A shares typically charge a front-end load, annual expenses, and usually include a 12b-1 fee. Because these shares are said to be the cheaper shares, investors who are in the market for the long-term usually prefer these shares.
Class B Shares:
Expenses on these shares usually consist of a back-end load, and annual expenses. The back-end charges usually decrease the longer the shares are held, but typically, the annual expenses are greater on B shares than on A shares. If an investor holds B shares long enough for the back-end load to be eliminated, the shares will convert to A shares, so the lower expenses of A shares take effect.
Class C Shares:
These shares do not charge loads, but typically have higher expenses than A shares. These shares do not convert to A shares. Therefore, if an investor has a long-term time horizon, it is typically not a good idea to invest in these shares, as higher expenses will probably be incurred. These shares are more appropriate for an investor who has a short time horizon for holding the shares.
Our Approach
At
The Henssler Financial Group, our investment philosophy states that if you have
less than $50,000 to invest, mutual funds are a more viable option to help you
formulate a well-diversified portfolio. We generally avoid load funds, as in most
cases no-load funds are available to provide the investor with a similar investment
mix without sales charges.
It is important that an investor consider
all fees and charges when purchasing a mutual fund. Some no-load funds have a
considerably higher expense ratio than others. Small Cap, Mid-Cap and international
stock funds usually have higher expense ratios than Large Cap stock funds, as
research on the companies in which these funds normally invest is more difficult
to find and evaluate. Remember that all funds, even money market funds, have expenses
associated with them.
Morningstar (either
a printed version or on the web) is a valuable source of information on the various
fees, expenses and sales charges associated with different mutual funds. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.