The Hard Truth About Wall Street Fees

In my work, I do a lot of flying. And in the course of the usual chat with my seatmate, the question inevitably comes up: “What do you do for a living?” 

The short answer . . .

I provide investment advice to the people who are responsible for America’s billions of dollars of employee retirement plan money — 401(k) plans and pension funds, specifically. I’ve been doing it for over 20 years. As such, I’m considered a “fiduciary,” which means that my firm and I are held to a very high legal and professional standard of investment prudence and competency.

So I spend a lot of time helping corporations, universities, and other large institutions — each controlling many millions of dollars in retirement assets — figure out the smartest way to manage all that money.

And I have to tell you: I truly my love my work.

I love it because, in a small way, I feel like I’m helping America’s workers — teachers, university professors, retail store clerks, truck drivers  and people in hundreds of other fields  — make their retirement dollars go further. They work hard, and look forward to a retirement that’s supported in a large part by their company or organization’s well-designed plan.

The smart investment decisions made by a retirement fund’s management committee add up to millions of dollars in additional gains over time. That means there’s that much more money to help fund the retirements of the employees in the future.

I have great clients with whom I visit with routinely, meeting with their investment committees to review and discuss our findings on their investment managers — which often leads to lengthy discussions about their “actively managed” mutual funds.

In this process — repeated thousands of times over my career — I noticed a particular problem with many of these mutual funds: chronic underperformance.

To put it simply, many of these actively managed funds — charging significant, ongoing management fees to achieve above-average returns — aren’t even matching what a passive, broad-based index of stocks like the S&P 500 achieves in the course of a calendar year.

And it’s a huge problem, bigger than most investors realize.

In fact, here’s what Standard & Poor’s came up with, when it measured mutual funds against their benchmark performance over the last five years:

  • 65 percent of large company stock mutual funds UNDERPERFORMED!
  • 81 percent of midsize company stock mutual funds UNDERPERFORMED!
  • 77 percent of small company stock mutual funds UNDERPERFORMED!
In all, S&P found that 80 percent of mutual funds — across multiple asset classes — failed to achieve benchmark-beating returns.

The big question here is why.

In my experience as an adviser to these institutions, I’ve identified two primary reasons that most (though not all) mutual funds chronically underperform their benchmarks:

The first is HIGH costs. Costs through fees (often hidden) that are paid by the mutual fund's investors (you). Now, here’s the really troubling part. According to a 2013 article published in Kiplinger’s, 80% of retirement plan participants don’t know that the mutual funds in their 401(k) plan charge fees!

This is a key point that shouldn’t be overlooked — investors like you pay active mutual fund managers a fee for superior performance, and those fees are typically expressed as a percentage of how much you invest in the fund.

So whether we’re talking about a company’s retirement plan with $50 million in assets, or an investor with $10,000 to invest — those fees add up.  

These fees are “built-in” to mutual funds returns, hurt performance, and can cost you huge amounts of money, every year, and even more over the life of your investment.

Let’s look at two such costs, as published in a recent Forbes article:
  • Expense ratios (for investment management and related expenses): Average annual expense: 0.9%
  • Transaction costs (considered “hidden fees”  — which very few professionals talk about — for things like commissions, market-impact costs, and spread costs; and related costs including cash drag, soft-dollar costs, advisory fees): Average annual expense: 1.44%
Add those two costs together, and you’ll come up with an average annual mutual fund cost of 2.34 percent, which ultimately comes out of the pockets of the fund’s investors. If a fund had $100 million in assets under management, then it’s charging its investors collectively $2.34 million a year (2.34 percent of $100 million) just to operate the fund.

Here’s what that means in real dollar terms: Every year the typical actively managed stock mutual fund actually starts January 1 down by 2.34%! That means it is very unlikely that the managers will beat their benchmark . . . such as the S&P 500.

Think about that.  If the S&P 500 index is up 8% at the end of a calendar year, then the fund manager needs to post a return better than 10.34% (8% + the 2.34% in costs) in order to truly beat the index.  

Now when you have very large sums of capital to invest — like our large company retirement plan clients — we can work to make certain that they have access to lower cost institutional funds that aren’t open to everyday retail investors.

So for the smaller investor, mutual funds fees can have an even bigger negative impact on fund performance.

The worst part about this is that when you run the numbers, these fees could actually destroy your retirement nest egg.

Consider the impact on your investment account . . .

Let’s suppose you invested $100,000 for 35 years in a mutual fund, and that fund was fortunate to earn a 7 percent growth rate. After those three and a half decades, you’d wind up with $1,067,658.

But remember, each year, you’re paying a cost of 2% (or more) in mutual fund costs. Over 35 years, that 2% annual charge adds up to $516,057!

That means your $1,067,658 account would only be worth $551,601.



Shocking isn’t it? 

To put it simply — and take this from more than 20 years of experience of analyzing thousands of mutual fund managers — you need to strongly consider how you can take control of your own investments and not pay these high fees to mutual fund companies to actively invest your money.

This is precisely why Steve Forbes, Jeff Yastine, and I, in partnership with Newsmax, have put together this Investment Crisis Summit. Not only will we lay bare these retirement roadblocks, we will also show you how to sidestep them with a new way to invest that could have you adding profits without added risk.

So stay tuned to this VIP Primer Series as we get you ready for this incredible event on November 6.   

Just keep an eye on your inbox tomorrow for another exclusive email from Jeff Yastine.

Best regards,

John Shubert

P.S. Also, if you have friends, family, or colleagues who you feel would benefit from this FREE online event with Steve Forbes, Jeff Yastine, and me . . . feel free to share the link below. But remember space is limited, so don’t wait — tell them to go to now.