The ABC’s of Investment Fees
Ed Hutton, CFA
Assistant Professor
Director, Niagara University Financial Markets
Laboratory
ehutton@niagara.edu
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Before we start…
• This seminar is intended to educate you on
how to understand the required fee disclosure
now being provided by investment companies.
It’s not intended to give a recommendation or
an evaluation regarding your personal
investment selection or strategy.
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Seattle Seahawks vs. Green Bay
Packers
• Did Seattle really win?
• NFL Referees locked out by owners over issue
of
• Defined Benefit vs. Defined Contribution
Pension Plans!
• Defined Contibution-401(k), 403(b) its your
responsibility
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Investment Returns
• Year to year increase in the value of your
investment- My XYZ Fund increased by 5% last
year; my $1,000 grew to $1,050 (1,000*1.05)
• Compound Return- Each year the investment
grows by the investment return multiplied by
the new balance. My XYZ Fund grew 5% again
last year, so now I have $1,081.50
(1,050*1.03)
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Investment Risk
• The possibility of having a negative or low
investment return. My XYZ Fund went down
by 10% last year- I went from $1,000 to $900!
(1,000 * (1-.1))
• Money Market, least risk-Stocks, most risk
• Large Cap, less risk – Small Cap, more risk
• Risk can also be called volatility, or B (Beta)
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Risk/Return Tradeoff
• So, why would anyone invest in something
with higher risk?
• Higher risk = higher investment return
• Factors to consider- Personality type, time
until retirement, other investments
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Investment Fees
• 4 types:
– Fund operating expenses: compensation to
investment company for expenses and profits
– Marketing Costs: commissions paid to the person
or company you bought the fund from.
– Service costs: charges for other services you
decide to buy form the investment company, such
as a loan or insurance
– Recordkeeping: Charge paid by your employer for
the costs of required paperwork.
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How do you pay these fees?
• Front-End Load: taken out from the amount
you are investing I invested 1,000 in ABC Fund,
after the 5% load was deducted, I only had an
investment of $950.
• Many funds are “No-Load”; no front end load.
• Front-End loads reduce the amount you can
accumulate for retirement, since less money is
earning an investment return.
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How do you pay these fees?
• Back-End Load (also known as Redemption
fee, or deferred sales charge): Deducted from
your balance when you withdraw the money.
• Back-end loads may decline over time, and
even disappear if you hold fund long enough,
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How do you pay these fees?
• Annual investment fees, also known as annual
operating expenses, deducted each year as
long as you own your investment.
• Basis Point = 1/100th of a percent; 100 bp is
1%
• Actual Return = Investment Return – Annual
Fees
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The Effect of Fees
• 8% investment return, 20 years, $5,000 per
year
• High fee: 220 bp; after 20 years total savings
equal to $180,022
• Low fee: 40 bp; after 20 years total savings
$218,919
• Difference of $38,897
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Are High Fee Funds Worth the Cost?
• If there are special considerations that require
a lot of personal attention
• If there is a particular investment strategy you
want to implement
• But• Not if you think that higher fees mean higher
investment returns
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Passive or Active Management?
• Active- Try to find the best stocks to beat the
benchmark
• Passive- invest in the stocks in the benchmark,
so will always perform at the benchmark level
• Index funds- passive, should always be low
cost
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