Have anyone thought ER/fees comes from gains but not total balance?

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ray.james
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Have anyone thought ER/fees comes from gains but not total balance?

Post by ray.james » Wed Apr 26, 2017 3:35 pm

This is actually a personal nitbit from pre-bogleheads days. I used to think adviser fees 1% is on the gains of the funds. My logic at the time when I read my first 401k plan was that I bought something and adviser is making gains, so he is taking a cut just like on profits of the gains. I did not really think the math along or realize that was very small amount for an adviser to work!

This came up this week when I corrected same confusion for a friend. Did anyone every think this way? Why do you think people conclude like this? I always thought I was an idiot of different kind to think like this. I was sure since I bought something; the fund will not have any expenses in other years except on the gains for reinvestment. :?
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939

TX_Man
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Re: Have anyone thought ER/fees comes from gains but not total balance?

Post by TX_Man » Wed Apr 26, 2017 6:15 pm

That conclusion could easily be made. Given the variety of fees and their nature nothing would surprise me. I wonder if there are any funds out there that have a separate fee on the gains and a separate fee on the dividends.

dbr
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Re: Have anyone thought ER/fees comes from gains but not total balance?

Post by dbr » Wed Apr 26, 2017 6:21 pm

TX_Man wrote:That conclusion could easily be made. Given the variety of fees and their nature nothing would surprise me. I wonder if there are any funds out there that have a separate fee on the gains and a separate fee on the dividends.
Not a fee but income tax works like that. Of course in that case the gains have to be realized.

I can see how someone might imagine an advisor fee would be a commission on delivering results. In the other direction it makes the investor look pretty stupid to pay someone to just have their name attached to assets sitting there. On the other hand not understanding that ERs are expenses that have to be paid and that it is fair to apportion that according to assets held is harder to grasp. All of this arises to some degree from the flim-flammery that investment companies practice to divest customers of their money.

Also, there is a tax analogy to AUM, namely taxes on property.

Wakefield1
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Re: Have anyone thought ER/fees comes from gains but not total balance?

Post by Wakefield1 » Wed Apr 26, 2017 10:16 pm

Aren't Mutual Fund ERs and fees closely defined by law (in the USA)?
what people don't seem to realize (and Mr. Bogle emphasized) is that that little extra 1% or so keeps hitting you every year again and again so it is really a big deal

PaulF
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Re: Have anyone thought ER/fees comes from gains but not total balance?

Post by PaulF » Thu Apr 27, 2017 8:28 am

Wakefield1 wrote:Aren't Mutual Fund ERs and fees closely defined by law (in the USA)?
Well, their disclosure is. I don't believe that the values are regulated.

fposte
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Re: Have anyone thought ER/fees comes from gains but not total balance?

Post by fposte » Thu Apr 27, 2017 8:32 am

I've seen advisors/salespeople in informal conversation strongly intimate this was the case, saying things for AUM like "I only make money when you make money." Nice to know they give it back in down years.

dbr
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Re: Have anyone thought ER/fees comes from gains but not total balance?

Post by dbr » Thu Apr 27, 2017 8:34 am

fposte wrote:I've seen advisors/salespeople in informal conversation strongly intimate this was the case, saying things for AUM like "I only make money when you make money." Nice to know they give it back in down years.
Actually their thought is sort of correct. They make more money if your assets invested increase. The "only" part is certainly misleading. The honest statement of course is "I always make money no matter what happens to you."

goingup
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Re: Have anyone thought ER/fees comes from gains but not total balance?

Post by goingup » Thu Apr 27, 2017 8:43 am

I don't think confusion about ERs and advisor fees is unusual. Advisors stand to gain by being opaque. Many investors have no idea they may be paying AUM plus fund ERs. Many folks likewise have no idea about front-end loads, and back-end loads.

When I first learned about the corrosive effect of high ERs I could not wait to revamp our 401Ks and IRAs. We managed to dodge the bullet and never had an advisor.

fposte
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Re: Have anyone thought ER/fees comes from gains but not total balance?

Post by fposte » Thu Apr 27, 2017 9:41 am

dbr wrote:
fposte wrote:I've seen advisors/salespeople in informal conversation strongly intimate this was the case, saying things for AUM like "I only make money when you make money." Nice to know they give it back in down years.
Actually their thought is sort of correct. They make more money if your assets invested increase. The "only" part is certainly misleading. The honest statement of course is "I always make money no matter what happens to you."
To me those are importantly different. "I make more money the more money you make" is perfectly legitimate to say. "I only make money when you make money" is stating that fees come from gains and not total balance.

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GerryL
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Re: Have anyone thought ER/fees comes from gains but not total balance?

Post by GerryL » Thu Apr 27, 2017 4:40 pm

goingup wrote:I don't think confusion about ERs and advisor fees is unusual. Advisors stand to gain by being opaque. Many investors have no idea they may be paying AUM plus fund ERs. Many folks likewise have no idea about front-end loads, and back-end loads.
I always wince when people tell me how much they like their advisor "and s/he doesn't charge me anything." From that statement I assume they have no idea how much they are paying to invest.

When I deliver the Investing module of the financial literacy program I deliver in high schools, I include a slide titled "How much do you want to pay to invest?" and outline the different ways "financial advisors" are compensated. I tell them if they don't understand this, odds are they will pay too much.

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