Asset-Based Fees – Are They Worth It?

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Written By Mark

Mark is the co-owner of and has many years of experience in financial markets. 

One of the drawbacks that investors fear when working with a financial professional is the fees associated with their services that can cut into their investment costs, especially individual investors with limited resources to waste.

However, as of recent, many reputable firms, managers, and advisers in the finance industry have traded their usual sales commissions charges for a simple asset-based fee, which is determined by the value of your fund.

Beware of load and asset-based fees

Just note, as an investor, you will still also be required to pay expenses associated with the operating costs of your account, such as a load fee when you acquire or sell the asset.

In some cases, you will also be charged annual 12-b1 fees for portfolio management or advisory fees.

Even in the case of no-loads, unless it states that is a 100% no-load asset, it will still include asset-based fees; however, they are simply disclosed in tiny print at the bottom of the page, which you are most likely to overlook.

And even then, there is no cost breakdown for the annual management fees associated with the portfolio’s activity.

The same is often true concerning no 12b-1 fees accounts.

Examples of cumulative net returns

For instance, a cumulative net return on $50,000 with a 9% annual return on a no-load, no 12b-1 fees account totals just $53,750 the first year due to an underlying asset-based fee of 1.5% fee.

However, the same $50,000 initial investment in a 100% no-load account equals $50,000 at the start and then $54,000 after year 1.

To view this same example in terms of the cumulative net return on an investment involving a $50,000, 9% annual return, no-load, no 12b-1 structure with a 1.5% underlying asset-based fee, calculations show that it totals just 7.5% for the first year and only 24.2% in year 3.

On the other hand, the cumulative net return on investment for $50,000 with an annual rate of return of 9% for a 100 no-load structure yields 9% in year one and then totals 29.4% after year 3.

The impact of front-end load fees

Meanwhile, front-end load fees, which is the cost account managers charge for the
acquiring of new shares in a portfolio, can also eat away at your investment.

To see how it also affects your account, let’s say you have the same $50,000 investment with a 9% annual rate of return, which includes a 0.25% 12b-1 fee and a 5.75% front-end load fee.

The initial $50,000 cumulative net return totals $47,125 and by year 1, it totals $51,248 compared to the $50,000 initial investment and $54,000 year 1 total of a 100% no load investment.

In another example involving a disclosed asset-based cumulative fee of 1% on an initial $50,000 investment with a 9% annual return, by year 3, it totals $62,986 compared to the same initial investment and rate of return in a 100% no-load structure; however, it totals $64,715 in year 3.

Fees affect your return on investment

Hence, we see using these examples that not all investment structures are created equal, which ultimately affects your portfolio management costs and thus your return on investment.

In essence, it also reveals that even no-load and no 12b-1 fees structures are not always what they advertise. So if you are really looking to save on asset management-based fees, go with a 100% no-load structure for the most favorable cumulative return.

A few exceptions

If you have a portfolio with a net worth in the millions, then it may be justified to pay asset-based fees for the level of skills required to keep your investment at peak performance.

Likewise, if you make a lot of trades within your equity portfolio, it requires more work on the manager’s behalf.

So it justifies the fees, especially if their advice leads to effective investment strategies that consistently turn out to be profitable.

However, if you only have a few shares in an equity fund or the majority of your shares are in mutual funds, then asset-based fees may not be worth it for you because managing these types of investments isn’t as complicated.

Instead, you may consider simply researching personal investment resources to help manage your own assets and save on fees.

Select the right investment structure for you

Overall, it is up to the investor to select an investment structure that best meets their goals and risk tolerance, etc.

However, you may also consider seeking your fund manager’s recommendation on the best asset allocation strategy for your objectives to help make the most profitable selection.

You may also find that over time, your investment goals have changed, such as if you have added a large number of assets to your portfolio to rebalance it, in which case you will need to adjust your strategy to meet your current goals.

Likewise, as time goes on, you may also find that your risks have changed, in which case you may also consider a new strategy for diversification to help mitigate these risks.

All of which can be done without costly asset-based fees, with the exception of precious metals since the IRS requires a designated depository to hold it. Check our guide on choosing the best gold IRA company if your interested in that asset.

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