Costs of Owning a Mutual Fund

One important feature of a sound retirement portfolio is to be mindful of costs associated with maintaining your investments. At Bill Westcott, Incorporated we have specialized in conservative cost efficient strategies to help clients meet their retirement goals for over 40 years. If you would like help finding out how efficient your investment choices are, please give us a call and schedule a consultation.

Expense Ratio

The management expense ratio (MER) reduces the fund’s assets and the return to investors. It is determined by dividing a fund’s operating expenses by the average dollar value of assets under management (AUM). The MER is a partial cost of a mutual fund which is used for administrative and operating expenses.

Brokerage Commissions

Includes costs such as sales loads, redemption/purchase fees, 12(b)1 fees and trading costs to the fund for buying and selling securities in its portfolio.

Market Impact Costs

Actively managed funds may involve more frequent buying and selling of assets and will tend to generate higher transaction costs.

Spread Cost

Market impact costs can be a lose-lose situation for mutual fund investors because they may get unfair pricing on both the buy and the sell side of stock transactions. Unfavorable pricing may occur in large buy or sell transactions because the transaction will likely move the stock price before the order is completely filled. A manager may mitigate market impact costs by entering or exiting positions over longer periods of time and managers may include less favorable stocks in its portfolio to alleviate market impact pressure on its favorite stocks.

Tax Costs

Purchasing funds with embedded capital gains may force investors to pay taxes on portfolio gains they did not participate in.

Cash Drag

Expense ratios apply to 100% of the account even though a certain percentage of the funds’ assets are held in cash for redemptions or because stocks are performing incrementally worse relative to cash. It should be noted that cash held within a mutual fund could be beneficial during a time when stocks do poorly and incrementally more expensive when stocks perform well relative to cash.

Soft Dollar Costs

Mutual funds may direct managed money to companies providing research even if those brokerage companies are not providing the most cost-efficient brokerage commissions. This cost comes into play when mutual fund managers are buying and selling stocks within the mutual fund’s brokerage account(s).

The following summarizes the average quantifiable costs described. Advisor and soft dollar costs are excluded due to the large range in advisory fees and the difficulty to quantifying soft dollar costs. When working with a financial advisor, it is important to add the advisory fee to the mutual fund costs listed below for an accurate depiction of total potential costs.

Non Taxable Account

Expense Ratio*
Transaction Costs
Cash Drag
Total

0.90%
1.44%
0.83%
3.17%

Taxable Account

Expense Ratio*
Transaction Costs
Cash Drag
TAX
Total

0.90%
1.44%
0.83%
1.00%
4.17%

*Forbes Magazine “The Real Cost of a Mutual Fund” by Ty A. Bernike

Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor,
Member FINRA/SIPC.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All information referenced is historical and is no guarantee of future results. Your circumstances may vary. Investing in mutual funds involves risk, including possible loss of principal. Value will fluctuate with market conditions and you may not achieve your investment objective.