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Financial Advisors and Asset-Based Fees

The latest trend in mutual fund fees has major financial firms, advisors and financial planners offering their services to individuals with no sales commissions and, with no annual 12b-1 fees. Instead, these firms impose an annual asset-based fee, which, depending on the size of the portfolio, can range from 0.25-2.0% of the assets. These are known as asset-based fees, portfolio management fees, or advisory fees. What is important for investors to realize is that this type of fee is separate for managing one’s portfolio and is often in addition to the normal operating expenses of the mutual funds within the portfolio.

Many investors will erroneously enter into an asset-based fee arrangement under the guise of no loads and no 12b-1 fees. In the vast majority of advertisements, the mention of no loads and no 12b-1 fees is prominently featured, while the asset-based fee disclosure is buried in tiny footnotes; however, no hypothetical cost examples are given to illustrate how these annual management fees would affect portfolio performance. We’ve provided a comparison of cumulative net return versus cumulative return on investment to show how portfolio performance can be affected.

* Asset allocation does not guarantee a profit or protect against loss in declining markets. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio or that diversification among asset classes will reduce risk.