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Mutual Fund Fees Matter More Than You Think I Daniel T. Newquist, CFP®, AIF® is a Principal Wealth Advisor with RNP Advisory Services, Inc., in Morgan Hill with over 19 years experi- ence advising clients on their personal wealth, retirement planning, insurance, and business planning needs. Investment advisory services offered through RNP Advisory Services, Inc. – a registered investment advisor. Securities offered through Securities America, Inc., member FINRA/SIPC. RNP Advisory Services and Securities America are separate entities. The Investment Fiduciary standard of care applies to adversary services only. Website: Phonel: 408-779-0699. between mutual funds, it doesn’t tell us much about how a fund will do in the future. Researchers at The Vanguard Group conducted their own analysis of how expenses relate to performance by comparing the least expensive mutual funds to the most expensive mutual funds over a ten-year period. The results, in the table below, show a noticeable gap between the two groups over the ten-year time period they evaluated. In every case, the group of lower-cost funds out- performed the higher-cost funds. Why Fees Matter Mutual fund fees carry such weight in the investment selection process because they are always there. Whether a mutual fund goes up or down, or outperforms its benchmark or not, mutual fund fees are always present. Obviously, there are exceptions to the rule, and buying the lowest-cost mutual fund does not make future success a guarantee. But fees should be considered when comparing funds of a similar asset class to each other. Fees are something that should be looked at carefully when choosing investments and evaluating the mutual funds and exchange traded funds used in your accounts. Lower costs can support higher returns Average annual returns over the ten years through 2012 By Daniel T. Newquist, CFP®, AIF® f you had to pick one factor that would determine the future success of your mutual fund versus its peers, what would it be? Maybe manager tenure, the reputation of the mutual fund company, the fund’s Morningstar rating or the fund’s three-year performance track record (or maybe a longer period) come to mind. Those would all be good factors to review, but they don’t necessarily stack the odds of future performance in your favor. It turns out that the amount you pay a mutual fund matters more than the factors listed above. Many researchers have explored the impact fees have on investments. In one study, Morningstar, Inc., tested its famous star rating system against mutual fund fees. In their star rating system, they assign the best-performing funds five stars and the worst one star. They wanted to see if an investment in five-star funds would help you outperform low-cost mutual funds. In a couple of cases the star system won, but in the majority of cases, the expense ratios strategy did a better job of predicting which mutual funds would do better than average in the future. While the star system is a great way to simplify the historical comparison process Median fund in lowest-cost quartile Median fund in highest-cost quartile Source: The Vanguard Group, Inc. Past performance is not indicative of future results. All mutual funds in each Morningstar category were ranked by their expense ratios as of December 31, 2012. They were then divided into four equal groups, from the lowest-cost to the highest-cost funds. The chart shows the ten-year annualized returns for the median funds in the lowest-cost and highest-cost quartiles. Returns are net of expenses, excluding loads and taxes. Both actively managed and indexed funds are included, as are all share classes with at least ten years of returns. GILROY • MORGAN HILL • SAN MARTIN MARCH/APRIL 2017 97