| Topic - Financial Advisors & Asset-Based Fees | Education Center |
The latest trend in mutual fund fees has major financial firms, advisors and financial planners offering their services to individuals with no sales commissions and, in some instances, with no annual 12b-1 fees. Instead these firms impose an annual asset-based fee, which can range from 0.5-2.0% of assets, depending upon the size of the portfolio to be managed. These fees are known as asset-based fees, portfolio management fees, advisory fees, etc. Regardless of the name that these asset-based fees go by, investors should realize that this type of fee is a separate fee for managing one's portfolio -- one that is in addition to the normal operating expenses of the mutual funds within the portfolio.
Many investors often erroneously enter into an asset-based fee arrangement under the guise of no loads and no 12b-1 fees. In the vast majority of advertisements, the mention of no loads and no 12b-1 fees is prominently featured while the asset-based fee disclosure is buried in tiny footnotes. However, even in the disclosure, only the annual fee percentage is stated -- no hypothetical cost examples are given to illustrate how these annual management fees would affect portfolio performance.
Let's review a hypothetical example with the following parameters: a one-time $50,000 investment with a 12.0% annual return rate, after annual fund operating expenses of 1.0%, over ten-years. The following illustrations compare the difference in cumulative net return (i.e., after all expenses and fees) and cumulative net Return On Investment among the following four structures (cumulative asset-based fees are also listed):