I ran across some interesting statistics in SmartMoney magazine the other day. They were tied to an article pointing out that while many mutual funds are now enjoying lower operating costs, many fund companies have actually raised the annual fees they charge shareholders.
Overall, it seems that fees have fallen about 6% over the past five years. That's good. And at some fund companies, the drop has been even more pronounced -- Vanguard's average fees are down 22% to 0.21%, and they were already just about the lowest around. Fidelity's fees are down 11% (to 0.72%). ING Group
But according to the article, which cited Morningstar data, Charles Schwab's
Why, why, why
So what's behind those hikes? Part of the answer has to do with each company's mix of index funds and actively managed funds. For example, Schwab has focused on managed mutual funds, and that management costs money. The Schwab Health Care fund (SWHFX), for example, launched in 2000, charges 0.84% for its expense ratio. The Schwab Large-Cap Growth Select fund (SWLSX), launched in 2005, charges 0.99% per year.
Here's another reason for some widespread hikes in annual fees: The way that many funds are sold has been changing. Financial advisors and brokerages (and financial advisors housed at brokerages) are more involved than ever, and when they get clients to invest in a certain fund, they often expect to be rewarded with a sales commission. Guess who coughs up the moola for that? Right, the shareholder.
SmartMoney cited Rydex as a "fund family that raised expenses to encourage brokers to sell its funds." It added: "And it worked -- assets in the funds have nearly doubled."
What to do
So what should you do with this information, now that you're in the know? The main lesson is to look at fund fees whenever you're shopping for funds. Beyond that, it's smart to look at fund fees after you've invested in the funds, too. Check in on your holdings every now and then to see whether the fees have risen or fallen, and why.
Know that in many cases, there will be several versions of the same fund, featuring different costs. Some may be designed for brokers to sell, and might charge, say, 1.5% or even 2% per year, whereas another version might be one originally meant for individual investors to find and buy, and it might sport an annual fee closer to 1%.
Pay attention to loads, too, which are (generally) one-time sales charges that can be as high as 5% or even more. Invest $5,000 in a fund with a 5.75% front-end load, and your hard-earned money will receive a $287 haircut on day one. I won't tell you to never invest in a load fund, as some can still deliver well for you. But, overall, know that there are enough wonderful no-load funds out there that we can really avoid loaded ones.
Finally, when you look for top-notch funds, try to read up on fund managers, seeking those whose philosophies and styles appeal to you. Look for low fees, of course, but also low turnover and strong track records.
For more fund ideas, check out our Motley Fool Champion Funds newsletter. A free trial will give you access to all past issues, so you can read about each pick in detail.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Schwab is a Motley Fool Stock Advisor recommendation. Try any of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.