What is net asset fee?

Answer 1

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, in some instances, with no annual 12b-1 fees. Instead these firms impose an annual asset-based fee, which can range from 0.5-2.0% of assets, depending upon the si ze of the portfolio to be managed. These fees are known as asset-based fees, portfolio management fees, advisory fees, etc. Regardless of the name that these asset-based fees go by, investors should realize that this type of fee is a separate fee for mana ging one's portfolio -- one that is in addition to the normal operating expenses of the mutual funds within the portfolio. Many investors often 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, even in the disclosure, only the annual fee percentage is stated -- no hypothetical cost examples are given to illustrate how these annual management fees would affect portfolio performance. Let's review a hypothetical example with the following parameters: a one-time $50,000 investment with a 12.0% annual return rate, after annual fund operating expenses of 1.0%, over ten-years. The following illustrations compare the difference in cumulative netreturn (i.e., after all expenses and fees) and cumulative net Return On Investment among the following four structures (cumulative asset-based fees are also listed): * 100% No-Load * Front-End Load of 5.75% plus annual 0.25% 12b-1 Fees * Asset-Based Fee - 1.5% (no load, no 12b-1 fees) * Asset-Based Fee - 1.0% (no load, no 12b-1 fees)

Cumulative Net Return Comparison StructureStart Year 1 Year 3 Year 5 Year 7 Year 10 100% No-Load $50,000 $56,000 $70,246 $88,117 $110,534 $155,292 5.75% Front-End Load

with 0.25% 12b-1 Fee $47,125 $52,648 $65,712 $82,017 $102,387 $142,745 1.5% Asset-Based Fee $50,000 $55,160 $67,132 $81,704 $99,437 $133,509 Cumulative Fee 840 2,789 5,161 8,047 13,596 1.0% Asset-Based Fee $50,000 $55,440 $68,160 $83,798 $103,025 $140,444 Cumulative Fee 560 1,869 3,478 5,458 9,310 Cumulative Return on Investment ComparisonStructure Year 1 Year 3 Year 5 Year 7 Year 10 100% No-Load

12.0% 40.5% 76.2% 121.1% 210.6% 5.75% Front-End Load

with 0.25% 12b-1 Fee 5.3% 31.4% 64.0% 104.8% 185.5% 1.5% Asset-Based Fee

10.3% 34.3% 63.4% 98.9% 167.0% 1.0% Asset-Based Fee

10.9% 36.3% 67.6% 106.1% 180.9% In these illustrations which depict identical 12% annual returns for all four structures, the 100% no-load structure obviously provided the greatest cumulative return. However, the asset-based fee examples eventually under-performed the front-end load and annual 12b-1 fees structure, especially the 1.5% example. Over time, these asset-based fees are significantly greater than the 5.75% front-end load and 0.25% annual 12b-1 fees. The important thing to realize is that all fees curb future performance since these expenses are removed from actual "dollars at work". Yet, there may be situations where asset-managed fees are preferred: individual stock portfolios that trade frequently; a timing system; sizable portfolios (over one million) where at least 33% of the holdings are individual stocks. Before entering into any asset-based fee arrangement, calculate the cost and determine if that cost justifies the management that one would receive. Specifically, one has to gauge the asset-based fee to (1) the quality of the investment strategies and recommendations and (2) the frequency of the recommendations. The key issue for every investor is whether management of one's portfolio is actually needed. Generally, the size and complexity of a portfolio is the determining factor for individual portfolio management. If a buy & hold investor has the majority of assets in mutual funds, then there is little reason to pay the extra asset-based fees for individual portfolio management -- especially with the vast financial information available on the internet that allows investors to manage and track their own portfolios. The vast majority of buy & hold investors just need a "game plan" -- an asset allocation strategy that reflects their investment objectives along with specific fund recommendations to fit that strategy. Occasionally, updates in the strategy and recommendations may be necessary, depending (1) if investment objectives have changed or (2) if significant investment additions will occur which may necessitate more diversification in one's portfolio. However, one does not need expensive asset-based fees to accomplish this -- a flat fee or hourly rate with no other applicable fees is the most cost-effective way method.