Financial Opinion and Insights

Fund Expenses Do Matter

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

For the Up-Teenth Time…..

You’ve just been introduced to the Acme Tactical Strategic Allocation Contrarian Fund of Funds with an overlay manager who monitors the other managers to make sure the overall fund objectives are met.


They’ll very probably meet their fund objective okay:  To make money on layers of fees extracted from investor assets.

I’ve always been a little suspicious of funds with long names that contain words like ‘strategic’, ‘tactical’, etc.  I think they charge by the word, but I could be wrong.

These funds will usually have all the typical fund fees for each fund, and often have an additional wrap fee that’s `wrapped around’ all the funds inside.   So, hypothetically, the internal funds could have, say, 1.5% in expenses, wrapped with another 1% or more in overlay fees.   In a case like that, you could be looking at 2.5% or more in total costs!

Did your advisor recommend this fund?  How about advisor compensation?  Oh, it’s included?  Where?   Why?  Why didn’t the advisor simply construct a blend of low-cost index funds for the core of the portfolio and use an active manager for a small portion for return enhancement?  That would have been a lot cheaper, and without getting into risk management theory, would have accomplished most of the same objectives!

Even if the blended indexes representing this exotic offering achieved a return of 10% in its first year, the offering’s underlying portfolio would have to achieved 12.5% just to tie the indexes.  Remember, a 2.5% premium on a 10% market represents a 25% outperformance.  Not as easy as 2.5% makes it sound.

Yes, I think the fund objectives will be met.

But, will yours?



Jim Lorenzen is a Certified Financial Planner® and an Accredited Investment Fiduciary® in his 20th year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors and selected individual investors. Plan sponsors can sign-up for Retirement Plan Insights here.  IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader.  The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Written by Jim Lorenzen, CFP®, AIF®

March 6, 2012 at 7:55 am