Investment Advisory Services Plunder Individual Retirement Accounts

I’ve always been a fan of Scott Burns’ finance articles, and this one is no exception.

He paints an ugly picture of financial service fees relative to investor’s returns, suggesting that fees are significantly higher today, than in the past, relative to the return that the average investor is getting from their financial products.

As a great writer should, Burns does concede to any potential opposition right away, suggesting that the absolute fees for mutual funds are lower now than they were at their all-time peak, a few years ago.  (Note**  According to John Bogle, they are still significantly higher than they were 50 years ago)

It might be true that there are lower recent fees, but the examples Scott Burns gave (of lower fees for two specific funds) weren’t complete.  Perhaps he was going too far to appease the mutual fund industry.  I think he knows the true fees associated with, say, the American Funds Income Builder fund, but for some reason, he didn’t add them all up.  He mentions one aspect of their fee, but misses out on two others.  He then compared Vanguard’s S&P 500 index fund to The American Funds Income Builder, creating an unintentional impression that the two funds weren’t as dissimilar in fees as they truly are.

Mr. Burns wrote:  “The Vanguard 500 Index fund, always a pricing leader, had expenses of 0.16 percent in 1985 and costs 0.16 percent today, according to the Morningstar database… The American Funds Income Fund of America cost 0.66 percent in 1985 but is less today at 0.55 percent”

The two fees associated with American Funds that he failed to mention were the 0.26% 12B1 fee which is added to the 0.55% expense ratio and the 5.75% sales commission fee–neither of which are charged by Vanguard.  The 12B1 fee is for sales and marketing, but it’s a fee that the advisor pays every year, based on their total assets.

The total fee for Vanguard’s S&P 500 index is 0.16%, and the American Funds Income Fund charges 4 times more, at 0.81%, not including its 5.75% sales fee.

Omitting these fees may not have hurt Mr. Burns’ thesis, but it didn’t help it much either.  When looking at fees, it’s important that we take a page out of David Swensen’s book, and examine all fees whenever we make comparisons.

That said, the article makes a very good read, and a good point.  Fees are excessive, relative to investment returns.

The Financial Services “Tax”

By Scott Burns,  July, 2009.

If we consider financial service fees as a “tax” on the earning power of our money, millions of savers are now paying at a rate of 90 percent. Some are paying more. This means the financial services industry can take 90 percent, or more, of every dime earned in interest and dividends.

The people who pay this tax are not the richest Americans. They are everyday people with everyday incomes— teachers, state and local employees, or any worker with an expensive 401(k) or 403(b) plan.

It wasn’t always this way…