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Fees Will Kill Your Returns But Nobody Seems To Care

If I discovered my doctor received a ‘kickback’ of cash for every procedure and drug I was prescribed, I would be pretty upset.

So why aren’t even a small fraction of the 90 million mutual fund investors more agitated by fees charged by mutual funds?

Today, 44% of American households own more than $12 trillion in assets at mutual funds, and the top 25 fund complexes hold 73% of the assets according to the Investment Company Institute’s recent data. Many of these companies are publicly held, like BlackRock, Invesco, Principal Financial Group and T. Rowe Price. Theoretically, fees would be transparent, but that does not appear to be the case.

In today’s climate of anemic equity and bond market returns, why aren’t more investors voicing their objection to fees? Possible answers are that investors are indifferent to fees; they are confused, or they don’t realize what fees they are actually paying.

Examine the popular 401(k) programs offered by many large and small companies and discover an even more disturbing series of hidden fees. The non-partisan General Accounting Office recently released an instructional video explaining 401(k) revenue sharing. Even though it is only five minutes long, most investors are as likely to understand this video (much less watch it) as they are to read the instruction manual for all three remotes for their TV.

One possible solution? Admit most investors will not attend two hours of training on their TV remotes nor will they listen to a boring, fine print-like explanation of their 401-k fees. However, all investors seek to reach financial goals and do in fact grasp basic addition and subtraction. Thus financial services companies and investment associations could show real leadership if they created compelling videos and imaginative ads that illustrate how fees work. In so doing, both clients and the fund companies will benefit. And just maybe we can restore trust in our industry at the same time!

IPI is a 20-year old membership organization that connects 1,100 ultra-high-net-worth investors to one another inside an online community and at events throughout the year.