Note that neither higher nor lower expenses guarantee better performance. A Fund with lower expenses may perform better than a fund with higher expenses and vice versa.
 
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor.
 
Investing in mutual funds involves risk, including possible loss of principal. Investments in specialized industry sectors have additional risks, which are outlined in the prospectus.
 
Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information about the investment company. You can obtain a prospectus from your financial representative. Read carefully before investing.
 

UNDERSTANDING MUTUAL FUND FEES AND EXPENSES

 
Why should I use a fee-based advisor instead of a broker?
 
That’s a great question, and as a feebased advisor, one that I get often. The short answer is: Better service incentives and competitive costs. I will expound in greater detail below. For now, let me say that there is a common misconception that brokers provide their services for free; therefore they are cheaper than an advisor who charges an asset-based fee. Investors ask me, “Why should I pay a fee for my investments”?
 
Know that there are costs involved in purchasing and owning a mutual fund that all investors pay. The fees and costs paid by the investor vary with the class of fund purchased, the amount of money invested and the length of time a fund is held. This is true whether you purchase through a commission based broker or a
fee-based advisor.
 
Let me provide the following primer on the costs associated with buying and owning mutual funds.
 
Mutual Fund Classes
 
A single mutual fund, with one portfolio and one investment advisor, may offer more than one “class” of its shares to investors (example: A, B, C, F, I or R). Each class represents a similar interest in the mutual fund’s portfolio. The principal difference between the classes is that the mutual fund will charge you different fees and expenses depending on the class you choose.
 
Mutual Fund Costs
 
The costs of owning a fund can be found in “the expense ratio”; sometimes called “operating expenses.” The expense ratio covers the investment advisory fee, the administrative costs, the 12b-1 distributions fees, and other operating expenses.
 
An expense ratio of 1% would represent a 1% annual charge to the fund’s assets – including your proportional interest if you owned the fund. All mutual funds have an expense ratio or an operating expense. The expense ratio can vary with the type of class purchased. You can find the expense ratio in the standardized fee table in the front of a fund’s prospectus or by utilizing the “fund analyzer” found at www.finra.org.
 
Mutual Fund Loads
 
A “load” simply relates to a mutual fund’s sales charge. A “load fund” is simply a mutual fund with a sales charge. Sometimes you are charged up front in what is known as a “front load”, this type of load is usually associated with class A shares. You may pay a charge when you sell your fund in what is called a “back-end” load, sometimes called a “contingent deferred sales load (CDSL)”; this type of load is usually associated with
class B shares and can also be found in class C shares. “No load” means there is no sales charge.
 
Basic Differences Between A, B, C, F, I and R Classes
 
A Shares typically charge a front-end sales charge or “load” that is deducted from your initial investment. Class A shares often offer you discounts on the load, called breakpoints, on the front-end sales charge if you meet certain conditions, including but not limited to, making a large purchase or owning other funds in
the same fund family.
 
A Shares generally have lower 12b-1 fees* than B or C shares, and as a result their operating expenses over time are generally lower than B or C shares.
 
B Shares charge a back end load, or a contingent deferred sales charge (CDSC), which you pay if you sell your shares within a certain number of years. The CDSC normally gets smaller each year and is eventually eliminated after several years, usually six. At this point, the B shares often convert to A shares which have a lower operating cost.
 
C Shares typically do not charge a frontend sales charge. Class C shares generally impose a lower CDSC than Class B shares (e.g., 1%) and for a shorter period, such as one year. C shares typically impose higher annual operating expenses than Class A shares due, primarily, to higher 12b-1 fees. Unlike B shares, they typically do not convert to Class A shares and, instead, continue to charge higher annual expenses (including 12b-1 fees) for as long as the shares are held.
 
F Shares are designed to meet the growing demand for fee-based services. These shares allow investors to purchase mutual funds for an annual asset based fee – usually 1% to 1.5% of assets – rather than paying sales or commission charges. Typically, you need an advisor to access these funds.
 
I Shares, often called “institutional shares,” are sold without upfront loads, CDSC or 12b-1 fees. They carry expense ratios similar to A shares, but require big deposits or access through advisors.
 
R Shares, or “retirement shares,” are typically found in corporate retirement plans. They are similar to I shares, but add additional payments to financial advisors and As previously stated, all the fees a fund charges can be found at the front of a fund’s prospectus or going to www.finra.org and utilizing the fund analyzer. What you will not find in the prospectus is brokerage costs incurred from fund managers buying and selling securities within the fund.
 
Why should I use a fee-based advisor?
 
Let’s utilize the FINRA fund analyzer to apply what we have learned so far about mutual fund fees and expenses. We input the assumption that the investor holds a fund for 10 years and realizes 5% returns
yearly. Mutual Fund Company “MFC” offers financial advisors several classes of funds to sell to clients. CommissionBased Broker “CBB” sells the client $10k worth of MFC class C shares. Fee-based advisor sells the client $10k worth of MFC class F2 shares (not available to CBB).
 
After 10 years the class C share has total fees and sales charges of $1,729.67 and the class F2 share has fees and sales charges of $516.94. When you add in an advisor fee of 1%*** a year the total increases to $1667.75. The class A share over the same period has fees and sales charges of $1,360.16 and the class B share has fees and sales charges of $1,501.66.
 
As you can see the costs are comparable, but is that the true cost? Consider that investors often do not stay in a single fund for long periods of time. Each time you decide to change funds in an underperforming class A, B, or C share you could potentially be increasing costs.
 
If you are employing a buy and hold strategy, you might be better served with a brokerage account. If you want the flexibility of higher trading activity you would likely be better served with an advisory account. Some products are not available through an advisory account and some are only sold on commission.
 
Think about performance and service incentives. My compensation is tied directly to the performance of the account, aligning my goals with your goals. Furthermore, an asset management fee can be tax deductible depending on your circumstances. For more information about the deductibility of asset management fees, speak with your tax advisor. ****
 
Now that you know more about mutual fund fees and expenses, don’t be fooled by false claims of a free lunch. Call me for a free consultation and learn more about me and my qualifications at www.joelyonsllc.com.
 
 

*12b-1 fees cover the costs of marketing and distributing the fund to investors, like sales charges they also can be used to compensate brokers or advisors. The 12b-1 fee is part of the expense ratio.
**This is a hypothetical example and is not representative of any specific situation.
***Advisory fees can vary significantly affecting your total cost.
****This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.