Remember when you were a kid, and “liar, liar, pants on fire” was a popular thing to say? Although I haven’t said that in years, I nearly did a few weeks ago.
Let me start at the beginning.
During a client meeting, I was reviewing a new investment plan he had been offered at work. This was in addition to the company 401k, and it was being handled by an insurance company.
As we began looking through the sales literature, I noticed only the investments in the plan, and the historic performance was listed. There was no mention of fees or expenses. It isn’t unheard of, but typically a prospectus is handed out with this information buried inside.
Since there wasn’t one, we placed a quick call the company offering the plan. After a series of menu’s, we were connected with the assistant of the person responsible for the plan at the clients company. I asked if she could fax me the list of investments with each of the expense ratio’s listed.
An expense ratio is the cost of owning a mutual fund. It is normally listed as a percent, and the average cost today is roughly 1.5%. The costs of the funds we manage is currently well under that, but that’s a topic for another day.
After explaining other details of the plan, the assistant explained that there is no cost associated with owning investments in the plan. In fact, all plan costs are handled by the company. Although it is not unusual for some companies to pay the plan level costs, individual investment costs are rarely paid for by anyone by the investor.
Because of this, I pushed back, and specifically asked what the expense ratio was for a couple funds. She, to my shock, explained there were none.
“So your doing this for free?”
Her answers got worse. She explained that yes, each fund does have an expense ratio, but that the participant doesn’t pay them, they come off of performance.
She then faxed me a letter stating the exact same thing. IN WRITING!
Needless to say, I was stunned that she could claim there were no costs, and then back that up by suggesting the cost is taken away from performance.
A cost is a cost, regardless of whether it is billed directly, and disclosed on the statement, or deducted from the fund without showing the cost in dollars. When you pay a fee, regardless of the source, it impacts your total return.
One component of our investment selection process includes a comparison of the total cost of owning one investment over another. We feel strongly in taking a total cost management approach to our clients investments. Because just like investment taxes, when it comes to expense ratio’s, it’s not what you earn that matters, it’s what you keep.
Be very suspicious if an advisor tries to tell you that an investment you are buying doesn’t have a cost if you hold it for X number of years, or that it only affects performance. Either that, or regress back to being 7, and leave them with a good dose of liar, liar…pants on fire.
photo by Carmella Fernando
