Penny Wise, Pound Foolish

When most of us go to make an important purchase – a refrigerator, furniture, or a car – we shop around.  We want to make sure that we don’t get taken advantage of and that we get a good value for our money.  So why is it that when it comes to investments, (mutual funds, in particular) many of us have no idea what we’ve invested in and what it costs?  Why would we rather haggle with a car salesman on a one-time purchase, than pay attention to our investment costs and our long-term financial goals?

There are many possible answers: maybe we’re not sure what we should be paying; or, in order to find out what we pay we have to read the dreaded prospectus (who wants to do that, and who can understand it, anyway?); or perhaps we really don’t believe that we can win this game, so why try?   Right?  Wrong.

There are many costs associated with owning a fund.  Many investors do not actually see these costs, as they are deducted from the fund’s returns, but make no mistake: High fees handicap your portfolio’s ability to outperform the market.  If you think of it as a race, a low fee investment starts one mile ahead of a high fee investment.  Wouldn’t you rather have that one mile edge? 

Let’s look at three similar investments, each returning 10%, but the fees charged vary widely.  After the deduction of fees, the returns are dramatically different: ranging from 6.65% for the high-cost investment to as high as 9.80% for the low-cost fund.  After 30 years, these fees would really impact your bottom line.  If you invested $10,000 in each of these investments, after 30 years, the high-cost investment would be worth $68,996; the average mutual fund would be worth $91,289; and the low-cost mutual fund would be worth $165,222 – nearly $100,000 more than the high-cost investment.  Of course, this example is hypothetical and does not reflect past or future results for any investment.

  High Cost Investment Average Mutual Fund Low-Cost Mutual Fund
Assumed Return (before expenses) 10.0% 10.0% 10.0%
Total Expenses 3.35% 2.35% 0.20%
Assumed Real Return (after expenses)  









 After 30 years, $10,000 grows to:  









So, how can you protect yourself from high fees?  How can you “shop around”?  For starters, know if the fund carries a sales charge. 

Typically, if a fund carries the letters A, B, or C after its name, it is considered a “loaded” fund (has a sales charge).  These products are “sold” to investors.  That is, a salesperson (a broker, for example) earns a commission for selling you the Fund.  These loaded funds also compensate a broker over the lifetime that you own the Fund.  That is why these Funds carry higher expenses.  Someone needs to pay the broker.  Look at it as a transfer of wealth:  a transfer from you to the Fund Company, and ultimately a piece of that goes back to the broker.  There is nothing improper about this; however, you may question if this arrangement between the broker and the Fund Company is as beneficial to you, as it is to them.  If the broker works for a company that sells its own proprietary funds (for example, Merrill Lynch), they are paid even more to sell the in-house product.  Will this influence a broker’s recommendation? 

Fee-only registered investment adviser firms (RIA), such as our sister company ATI Investment Consulting, Inc., are only compensated for the advice they dispense, so they work purely for their clients.  In fact, should an RIA receive compensation from any source other than a client, it must be disclosed to clients as a potential conflict of interest. 

By law, RIAs are held to the higher standard of acting in an investor’s best interest, which includes keeping expenses low.  Brokers need only sell you something that is deemed “suitable”.  To compare the RIA fiduciary standard to the Broker’s suitability requirement, consider this:  If a client needs long-term growth and a S&P 500 fund is an appropriate investment choice, but one option carries fees of 1.5% in addition to a 5% commission, and the other carries a fee of 0.15% with no commission, the RIA would be obligated to recommend the lower cost option, because low fees are in the client’s best interest.  The broker could sell the one that paid him more (a commission) even though it is more costly to the client, because the investment is still suitable for the client.

Furthermore, brokers are paid on transactions and earn commissions every time clients buy or sell, and they earn trail commissions when a client holds an investment.  Therefore, client satisfaction does not affect the broker’s compensation nearly as much as it does for the RIA.  A fee-only adviser does not have these additional sources of income as a safety net.  All an RIA has is the quality of his/her advice.  If that is shoddy, the RIA will soon be out of business.

Don’t be afraid to ask your investment professional how he/she is compensated.  It is in your best interest to know if his/her interests lie elsewhere.  Ignoring this question while clipping coupons, shopping sales and looking for bargains is truly an exercise in being penny wise and pound foolish.

Authored by: Anthony Dina Isola

Dina Isola, President of Real$martica, Inc. - COO and Director of Investor Relations, ATI Investment Consulting, Inc. Following a successful career in marketing communications in the financial industry, Dina and her husband, Anthony, founded a registered investment advisory firm, ATI Investment Consulting, Inc., and ultimately the idea for the educational company Real$martica, Inc. was born. In dealing with investors and hearing their concerns, she spearheaded ATI’s investor education efforts, coordinating with local libraries and townships to offer free investor education seminars. She has volunteered her time, writing financial articles and has conducted investor education classes geared to family financial matters. She is President of Real$martica, Inc. and is COO and Director of Investor Relations for ATI Investment Consulting, Inc. and personally handles all communications for both firms. She is active in her local business community and serves on the Brookhaven Business Advisory Council and is a member of the Three Village Chamber of Commerce. She earned a BA in English and Communications from Fairfield University. She is a registered investment adviser, and is a licensedreal estate salesperson in New York State.  Prior to founding Real$martica, Inc. she was a Vice President in charge of marketing communications for a privately-held investment management company in New York City.  She has worked in the financial industry since 1987. thumb_tony_isolasAnthony T. Isola,  President, ATI Investment Consulting, Inc. Anthony has married his passions, investing and education. He is President and founder of ATI Investment Consulting, Inc. (“ATI”) a registered investment advisory firm. His vast knowledge in matters of finance brings a well-rounded perspective to all that he does. As an educator, he has a natural ability to explain complicated economic and financial concepts and make the practical application of these concepts come to life. In working with clients, he recognized how overwhelming building a financial plan can be, especially when most investors are vulnerable due to their ignorance on financial matters. He prides himself on empowering investors to understand how to look out for their interests and not fall prey to financial arrangements that will take them off goal.  In addition to managing assets for clients, he has counseled investors on social security benefits, retirement income assessments, and college planning. He teaches history at Plainview Old Bethpage Middle School and oversees students’ participation in The Stock Market Game and financial literacy for the Plainview Old-Bethpage Central School District. He has taught financial related courses to children, parents and staff members in the district, as well as to Long Island residents. He holds a New York State Permanent Certification (in Social Studies). He earned a BA degree in Economics from Boston University and a MS degree in Secondary Education from Hofstra.  Prior to teaching, he worked as a foreign currency trader in New York City for large international banks.

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