The abc s of investment fees
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The ABC’s of Investment Fees. Ed Hutton, CFA Assistant Professor Director, Niagara University Financial Markets Laboratory [email protected] Before we start….

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The ABC’s of Investment Fees

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The abc s of investment fees

The ABC’s of Investment Fees

Ed Hutton, CFA

Assistant Professor

Director, Niagara University Financial Markets Laboratory

[email protected]


Before we start

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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Investment returns

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)


Investment risk

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)


Risk return tradeoff

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


Investment fees

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.


How do you pay these fees

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.


How do you pay these fees1

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,


How do you pay these fees2

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


The effect of fees

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


Are high fee funds worth the cost

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


Passive or active management

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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