Did you know that your investments cost money? Those mutual funds, ETFs, brokerage accounts, etc – are not free, despite the marketing. It takes people and companies to produce those products, so you better believe you are paying for them somehow. It pays to understand the costs.

The biggest one I want to cover today is called the “Expense Ratio” for a mutual fund or ETF because this is a yearly fee deducted from your investments. For any fund that you own, you can quickly look up the expense ratio which will be somewhere between 0% and 2%. If all your funds are in that 0-.2% range, you are doing well.

There are legacy funds that charge up to 1% or 2% but invest in the same universe of stocks as funds costing just .1% ! Do a quick checkup to confirm you aren’t in one of those.

Tune in to hear:

  • Why do funds have different fees?
  • When might it be OK to invest in a fund with a higher expense ratio?
  • What other fees are beyond the expense ratio.

Find out more about Mike at https://www.mortonfinancialadvice.com and connect at https://www.linkedin.com/in/mwsmorton/

Transcript
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Morton is a specialist in giving financial advice to tech professionals and entrepreneurs, but all of his advice is good for all of the rest of us, normal humans. And as always, it comes with a big disclaimer, look, this is just general guidance. You're not telling anyone what to go out and do, but people should pretty much listen to you. 


Cause you know what you're talking 


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Disclaimer, it's this is for entertainment purposes only. So you're above the level of, for entertainment purposes, only 


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You want to talk about expense ratios? 


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why. 


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You're a consumer of products, whether it's in your 401k or your IRA, you have individual stocks, you have mutual funds, ETFs, all kinds of things. And people have to put those together. And so you're purchasing them even though obviously they're investment vehicles. And so there's different fees and different structures of fees around that. 


And I think it's really important for everyone to just have an understanding. Of those fees. And trust me, once You have a quick overview, which is going to be today's episode, you'll be good to go. You'll have a great understanding of what to be looking for. 


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We care about our clients, and so in the Paris. The idea of the business was it was city change. They may change. If you bring in a dollar, we can give you four quarters. We can give you two quarters, four dimes, and two nickels. We want to work with you. And then the money line of the whole thing was people often ask us, how do we make money doing this? 


The answer is. Volume. And the point is that there's no way to make money doing this. Cause you're just giving people change. But no real business operates that way. Everyone has some kind of a fee, some kind of a margin, some kind of a something, which is how they make money. So it sounds like what you're saying is you should be aware of what that is because it can make a big difference. 


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And So the same is true with financial products and it's been painted in a bad picture. Of course there's bad actors everywhere. But really, I just want to do some education so that you understand how to keep most of the money in your own pocket. And what products I feel are better suited for the individuals 


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That's how they get paid. The one I wanna focus on today is the ongoing expense, because one time expenses . Are super important to know about, and there's a couple that, if we get to at the end, I want to highlight to be aware of, but really it's this ongoing expenses year in and year out because you put an investment, Hey, I'm going to put, in my 401k, I'm going to use this mutual. 


And they all have yearly expenses being deducted from that investment. And the reason simple, because there are people doing stuff, so they have to get paid. So that's not a problem, but you just want to understand what those are. Okay. So that's why I'm telling you this, because here's the, here's a very simple one. 


Say you had $10,000 and you want to invest it. Okay. Some funds you decide, you want to just put it in a fund, certain sector or whatever it is, some mutual funds or ETFs have. Expense ratio, ongoing expenses of 1%. Almost 1%. Okay. Some have as low as almost nothing like 0.05%. So basically almost nothing. 


Okay. So if you put in $10,000 and you expect us a 8% return and you were evaluating two different funds, if you are giving up 1% a year, you're paying 1%. So instead of 8% a year, you get seven. 


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You're left with an extra $6,000. 


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There's a joke in Washington, a billion dollars here, a billion dollars there. Pretty soon you're talking about real money, but for the rest of us individuals, a few thousand here, a few thousand there, you're talking about a big difference over 20 years. 


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So there was this one fund in their 401k. That was really just an S and P 500. That's really what it was invested in those top 500 companies. And, but it was charging 1% a year and you can get the same exact exposure into those 500 companies for almost like I was saying pennies. Okay. So almost nothing. 


So they had this fund and originally they put an $80,000, 10 years ago again, they had this million dollar portfolio, 10 years ago they had put in about 80. Into this one fund and just let it sit there for those 10 years, if they had used the low cost fund, instead, they would have had an extra $40,000 in their pocket, over those 10 years. 


And that's just one fund, 80,000 out of a million dollar portfolio would have put an extra 40,000 and just over those 10 years. 


So you can imagine it's like really important to review. Your portfolio, see what you're invested in. And that's what today's episode is about. Reviewing it, see what you're invested in and go for those lower costs funds, and replacing ones that have those high expense ratios. 


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And the point of it is we tend to question and implicitly devalue things that come at a lower cost. And I can understand that. When you tell me that mark and Lisa were in a fund that is an S and P 500. So that's the big. Traded companies. And it's just a fun that kind of indexes to those companies. 


And they're paying 1% what, there is a competitor that pays a 10th of a percent. What's wrong 


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And as other competitors came at technology, , obviously technology advances, these things become easier. Computers can do more stuff for us. We can get away with less humans, less costs. And so the index funds, that's why index funds. Cheaper, less expensive because they're easier to run S and P 500. 


Yeah. Pretty simple for a few computers now to just plug your million dollars into an S and P 500 fond. Okay. So that's a really easy example where these legacy funds still exist, Matt. And so that's the first thing for everyone to look at in your portfolio. Have you had funds for 10, 20, 30 years? And what are the expense ratios because people are not fleeing them. 


They don't understand, it's wow, this is just simply an S and P 500. I can get that now. Super cheap So there's one example that it's really easy to make sure to understand what, what you're invested in, but there are just simply replacement products that cost a lot less. 


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And. Why are those the two products that are a trade off for one another? Why do I 


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In classical economics, you're taught that the whole function of the marketplace is to have competition and to drive things toward the optimal price, right? The most efficient, the lowest cost. And so it doesn't seem like in a marketplace where there are a million competitors out there offering financial products, you can invest in this. 


There are so many funds you can invest in through the same brokerage, through the same bank, you have tons of options. So it doesn't seem like these old dinosaur legacy things out there charging you 1% should persist. But they clearly do. There's a little bit of an information lag going on here. 


And what really catches my ear about this is the classic advice. The advice that you've said many times on this show is don't futz around too much with your investments. Don't constantly try and time the market. Don't look at your statement every two minutes, just sit back. Relax, have a strategy, have a plan and stick with it. 


But this does seem to be one time where a little bit of a checkup is an order. 


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Now, whether you have to change any of your investments or strategies or your budgets or, whatever you're doing. Yeah. Maybe not. Okay. But when we talk about financial planning in general, like check-ups are great. Estate planning, life planning, all these things, you're still on track for what you want to accomplish, but this one in particular is interesting. 


And there's a lot of, like you said, man, there's just so many fricking. Involved in this because a lot of it's not traditionally is not individual investors going straight to the marketplace and choosing a variety of products, which you said is overwhelming even to begin with. Where do you start? But it's also legacy in terms of, who's invested in these 10, 20, 30 years ago. 


It's just through a broker it's through your advisor. The financial industry gets a bad rap for good reason, that advisor still has his clients in funds charging 1% when there's a simple swap that really should make the same return. , in this case, in these kind of index funds or closet index funds, they're called. 


, that's the, a good reason why the industry gets a bad. 


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And that doesn't mean that it's bad. It doesn't mean that it's wrong per se. Frequently, there are lower cost alternatives and there are trade offs. So first of all, I'll just say, as a story from my own personal investing, I reached a point about five or six years ago where I decided, I want to take a look at my expense ratios. 


And I discovered that I was in a fund with my IRA. W that had a relatively high expense ratio. It was up around 1%. And I went to my broker essentially, and I said, Hey, you know what? I think we should just go with a low cost kind of an index fund or, something really ultra low cost. And he said, sure, no problem. 


We can do that. And it wasn't that when he had me in was bad or wrong, it was a choice. It was a trade-off. And so that just highlighted for me. It's out there if you ask and if you look for it, but you should probably understand what those trade-offs are. So what are those trade offs? What are you getting something in some circumstances for having a slightly higher, expensive. 


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Usually it's called expense ratio. So it just start growing a little awareness. When you do that checkup, once a quarter, once a year, just look into it. Hey, what are the expense ratios like on the things that I own? Oh, now you're just building awareness on what you're invested in. 


So definitely take a look at that. Yes, absolutely. There are funds that cost more and that's perfectly fine. Okay. So I'm not arguing oh, you should definitely just always be in low cost. No. There's reasons why there are costs and some of them, you can make a personal choice and say yeah, I'm definitely want to pay for that. 


What might some of those be? One is active versus passive. I mentioned the index funds are very easy to run, easier to run. You don't need a team of people doing a lot of analysis. It's literally someone defines an index now, unfortunately there's hundreds of them. So that's even becoming a complicated. 


But if someone defines an index S and P 500 is the top 500 companies here in the U S for the most part. And so it's pretty easy to run a fund because all the names, in there. So other ones active are where you're employing teams of people that do research on what companies to invest in. 


So they'll research those top:

We've probably had one in the past. We'll have more in the future. I'm not a fan of active investing. All the research and literature I've read says it's impossible for managers or teams of managers to outperform index funds over 5, 10, 15 years, about 80% of them underperform. So the chances of you picking that one in. 


Pretty low. It's not worth the risk. In my opinion that's one active versus passive. Another one is how easy it is to invest in these areas. The U S is very cheap and easy to invest. So S and P 500 index fund total us stock market fund can be super low cost, but if you're talking about emerging markets, Or other markets they're more expensive to invest in with they're harder. 


There's more costs associated with them that get passed onto the individual investors. So don't be surprised if you have an emerging markets fund to see a 0.2% 0.3% 0.5%. Again, you just have to compare if you want to take the time. You can compare funds from different providers and you'll see, they're all going to be in, in that same range and it, but again, men, over time, they're coming down. 


So same thing that you found six or seven years ago Hey, I think I've just in this fund oh, it was 1% you're like, you can say, oh, mine's 0.5%. I could maybe find one for 0.2%. Now at some point we're getting into the weeds. All right. Once you get down to 0.1% and below you're perfectly fine. 


Don't sweat it any further than. 


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It's the city change joke. How do you make. And let's just be clear about that. In my case, the relationship I had with this financial advisor, I trusted him a great deal. I still do. I still have some money with him, and I know that I'm paying a slightly higher expense ratio when I started out, when I finally made enough money in my life, which wasn't always the case to actually be saving a little bit. 


I was actually happy to have someone keeping an eye on it, telling me what to do. And there were services that I was getting along with that there, they were giving me financial and retirement planning. They were doing some look aheads on where we saving enough. What, when I first got married, I was willing to pay a slightly higher expense ratio and get that suite of services as long as I understand. 


What I was getting with it. And so I think that there, what I hear you saying is it's just a buyer beware thing. It's not necessarily good or bad unless it's the situation that you pointed out with your clients where, mark and Lisa are just in a legacy fund where there's a substitute that just lower costs. 


And it's just a matter of doing a checkup and upgrading that. 


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Of course you're paying. Knowing how you're paying for it is really important and that world is shifting. And so again, I'll put another pin in it for a future episode around financial planning and what is available and how to pay for the things that you find valuable. Cause it used to only be one way of getting that. 


stuff. 


You hand me your money, I'll manage it for you. And I'll, give you some other stuff along with it. And now there's a variety of ways to get just what you're, what you might want in your life in terms of some advice or some help or some trust and stuff like that. 


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This is just a personal preference I'd rather have, and I know you work on this model to where I'd rather just pay a fee. It's you know what? I do want your retirement planning. I do want your checkup on everything I've got and let's, I'm going to pay you for that. And let's have that well understood and not bundled together, but it is a personal comfort thing. 


And it does seem to be the way the world is moving. 


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So you just want to be aware of that. There's not so much out there now, but mutual funds can come with what we call a load. So if you see that word and that's just paying upfront or at the end of fee, it's really just a fee. So you might put in, you think you're buying it for $10,000, but really only 900. 


Okay, sorry, $9,500 gets invested because the $500 was a fee it load to get into the product. So just be aware that they're not really out there these days. And then the last one is trading fees, which we can again, spend an episode on there mostly to zero now. You've all know the places that you can just trade and it doesn't really cost you anything, but it's, trust me, someone's getting paid somewhere in that process. 


So just be aware of that. 


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