Investment Bank Mutual Fund Fees Destroy their Client's Capital

The Clover Helix
www.thecloverhelix.blogspot.com
Thursday, February 25, 2010

In an early attempt to prepare for my own retirement I came to the inevitable conclusion that mutual fund fees, if left unchecked, can utterly destroy retirement savings. I’m sharing my experience here as many others may be unwittingly experiencing the same ordeal that I endured when it came to mutual fund investing for my personal retirement. If the true story I present here sounds like your own then take heed and make quick changes!

In 2002, I opened up a Roth IRA with Washington Mutual’s (WAMU) Investment Services Division and invested $3,000 in their family of mutual funds. I selected Washington Mutual because I had been banking with them for over four years and I knew every person at my home branch by their first name. In 2005, I took out $1,700 to purchase a home and left the remaining $1,300 in the account untouched until 2010 when I finally moved this small IRA (by which time Washington Mutual had been purchased by JP Morgan Chase aka JPMC) over to Vanguard. However, when I transferred the account to Vanguard, I found that only $975 of the original $1,300 remained resulting in a net loss of 25% over the eight year period. Where had the missing money gone?

During it’s time in the IRA, the money had been invested in a mid-cap domestic equity mutual fund that had attained only very meager positive returns and the value of the fund should have increased to about $1,535. After some number crunching I discovered the true culprit was my own trusted investment bank skimming off large fees from my tiny account.

It turns out that mutual funds have a lot of fees that are not always disclosed right up front. The mutual fund I purchased had a five percent sales fee or load that was paid to the investment bank over a five year period costing me $65 right at the start. I also paid the management fees for the fund amounting to about 1.2% per year over eight years resulting in another $125 in fees. Additionally, I paid a 0.25% annual 12B-1 fee so that the mutual fund could advertise their services to new clients costing me yet another $26 bringing the total so far to $216 over eight years; but we aren’t done yet. Because my account was worth less than $10,000 I was charged an annual account maintenance fee of $30 tacking on yet another $240 over eight years. In my disgust, I finally transferred the IRA to Vanguard, a true super-hero in investment banking, to get away from the oppressive fee structure that my IRA had been subjected to. However, upon closing the account at JPMC I was subjected to another $30 account maintenance fee for the upcoming year and, perhaps the most insulting of all, a punitive $75 account closure fee. The grand total I paid to JPMC to house a $1,300 IRA over eight years: $560.

Interestingly, these figures suggest that the fund had actually been profitable to me as my balance of $975 plus $560 in fees minus my initial $1,300 would imply that I had made a profit of $235 for a gross return of 18%. In fact this positive investment return is reported to the fund’s investors as an eight-year return implying that this fund would ave been a good investment in an otherwise down market. Fortunately the mutual fund was housed in a tax-free account or else I would have been subjected to a capital gains tax on the $235 of supposed profit making my losses even worse!

In short, had I simply invested the money in a savings account yielding just 1% I would have easily outperformed the WAMU/JPMC mutual fund and not paid a nickel in fees.