The Secret to Lower Fees
by John Hanahan
The keys to successful investing are understanding that it’s a long journey, that you will encounter obstacles along the way, and that you need to know something others don’t.
Okay, we all know it’s a long journey and that there will be obstacles. But what about knowing something that others do not? I’m not talking about insider information. That, of course, is illegal.
What I am talking about is being informed of opportunities. Do large cap stocks represent a better risk/return scenario versus small cap stocks? What about growth versus value? That’s called tactical asset allocation advice, which is well known to be very effective. I will assume that most readers get good tactical asset allocation advice and, more importantly, act upon it.
However, when it comes to implementing that tactical asset allocation advice, there is an opportunity that most people do not know exists. What if you could lower the management fees of your mutual fund by 20-30-40-50% or more? I am not talking about using index funds or exchange traded funds. I am speaking of institutionally priced mutual funds that are actively managed.
Institutionally priced mutual funds are typically the lowest priced share class available to purchase. They typically require high minimum investments or they are available via independent investment advisory firms. But if you can get access to them, they can make a dramatic difference in what you pay for investment management.
Here are two examples. Bill Miller of Legg Mason Value Prime is one of the most respected large cap managers in the market. Though past performance does not guarantee future performance—as 2006 proved for Miller—his fund, has outperformed (after management fees) the S&P 500 in 15 of the last 16 years. Morningstar shows Miller’s management fee to be 1.68% annually, which is well above the Vanguard Index 500 fund at .18% annually. Yet, after expenses, Miller has outperformed the Vanguard Index 500 Fund in 15 of the last 16 years. Quite amazing. What many people do not know is that you can purchase the institutionally priced shares of Miller’s Legg Mason Value Prime fund for an annual management fee of .69%. That is a 58% reduction in fees just by purchasing the institutionally priced shares.
The second example is for a fund that is very popular indeed. The PIMCO Total Re-turn fund is managed by Bill Gross. Gross is considered a very talented bond fund manager. This fund has many different share classes, and, as you might expect, there is a wide range of management fees associated with these different classes. According to Morningstar, here are the management fees for each respective share class: A-shares-.90%, B & C-shares-1.65%, D-shares-.75% and the institutionally priced shares-.43%. If you own the A-shares, you could switch to the institutionally priced shares and experience a 52.22% reduction in management fees. What is even more dramatic is difference between the B & C-shares and the institutionally priced shares. This translates into a 73.93% reduction in management fees.
The point here is not to recommend investing in either of these two particular funds. That is for you and your advisor to determine. My point is that if you know something that others do not, in this case institutional pricing, you may be able to improve your bottom line dramatically.
John Hanahan, MBA is President, Yukon Wealth Management, Inc.
P | 913.681.9200
E | JHanahan@YukonCM.com