Silent as Night

When I worked at a life insurer that was in the pension business, we would sometimes get asked to quote on business where termination of the existing plan would result in a surrender charge.  Now no plan sponsor would ever want to deliver a loss to participants — the effect on morale would be huge, so they would approach companies like ours and say something to the effect of, “If you pay our surrender charge off, we will invest with you.”

Not the happiest way to get business, but we reckoned that the fault was on the side of those that accepted the surrender charges in the first place.  We never did surrender charges on new business, but in order to get plan sponsors out of underperforming money managers, we would offer to pay off the surrender charge, at a price of a higher management fee plus a surrender charge.  We didn’t charge anything extra; we left our profit margin the same as with new clients.  We offered plan sponsors longer and shorter surrender charges, with correspondingly lower and higher annual fees.

As my friend Roy said, “We’re the good guys.  We’re out to save the world for 0.25% on assets plus postage and handling.”  But being “good guys” we helped hide the stupidities of plan sponsors, and to some degree, the cupidity of some mutual fund purveyors.

It also taught me a lesson.  When fees are deducted daily, no one notices.

You have read articles about how high mutual fund fees are, and you wonder why people buy them.  They buy them because they don’t look at the fees, and the fees get taken out quietly, night-by-night, imperceptibly.  They might also earn money from securities lending and soft dollar commission arrangements as well.  Their investors might reimburse some expenses also.

Now as for me, my business has just one source of revenue, my management fee as a percentage of assets.  I receive nothing else, and pay all expenses out of those fees.  It comes out once per quarter.  Savvy investors ask for direct billing, which I happily do, rather than deduction from the assets.

But it makes my cost to them very visible.  I am happy to live with that; I hope they are as well.

For those who use mutual funds, I suggest that you review the fees that you are paying. For those with 401(k) and similar plans, I suggest you look at the form 5500 documents behind your plan to see what you are implicitly paying.

Be aware.  In investments, charging through modest changes in the net asset value is the way most fees get siphoned off.  Big firms don’t like to talk about this, because it is their lifeblood.  You are your own best guardian, so review the fees of the firms that you entrust to invest your money.