Calculate Your Total Cost of Investing

Physician's Money Digest, June15 2003, Volume 10, Issue 11

For many physician-investors,the stock market's downwardspiral has eroded large portionsof their portfolios. While notpleasant, experienced investors cometo expect it as part of the costs andrisks associated with investing.However, new or increased fees beingcharged by brokerage firms, combinedwith the costs of runningmutual funds, are further eating awayportfolios. Some of these costs arevisible, but others are more obscure.


New York Times

Over the past few months, severalwell-known companies have raised orimposed new charges on brokerageaccounts with low balances and fewtrades, and added new fees to coverservices such as mailing accountstatements. According to an article inthe , the fees are a wayfor firms to maintain the marginsthey had before the market headedsouth. But for physician-investorswho have seen their portfolios decline,the charges add insult to injury.

For example, Charles Schwab hasincreased its account service fee by$15 (ie, $45 per quarter) for accountsunder $10,000. Merrill Lynch hasadded a new account service fee of$15 per quarter for accounts under$20,000.And Vanguard has instituteda new annual account service fee of$30 for brokerage accounts under$250,000. On a smaller scale,Oppenheimer Funds has added anannual fee of $12 for accounts withless than $500. The companies dopoint out that they may reduce orwaive fees for reasons including highbalances, frequent trading, and holdingof qualifying investments.

Fees for inactive accounts are becomingincreasingly common. Ameritradecharges $15 per quarter foraccounts with fewer than 4 trades inthe previous 6 months or for accountsthat have a balance of less than$2000. E*Trade charges $25 perquarter if you've traded less thantwice in the previous 6 months orhave less than $5000 in 1 of its accounts.Fidelity Investments, whichcharges $50 a year for brokerageaccounts with less than $30,000, willwaive the fee if an investor has had atleast 2 stock, option, or bond tradeswithin the previous 12 months.

Personal financial specialists saythese new fees make it vital forinvestors to shop around. That's easyto do when fees are clearly noted, butmany costs are not always as visible.


Buyer beware:

When you invest in your mutualfund of choice, you expect to pay asmall percent of your net assets.That's the fund's expense ratio, andit's clearly stated in the fund's annualreport. What's not clearly stated, accordingto the article, is a largeportion of the cost of running thefund: commissions paid to brokeragefirms and other costs associated withstock trades. Because these amountsare deducted from a fund's totalreturn, they can be easily overlooked.These costs can behigh, especially if a fund trades often.

A case in point is the RS MidCapOpportunities fund. The fund had aturnover of 409% in 2001. Commissionsand the estimated cost of over-the-counter trades totaled almost$3.2 million. Divide that by the averagenet assets it managed that year, inthis case $177.1 million, and the costsamount to 1.8%, even higher than thefund's 1.4% expense ratio for theyear. In effect, the cost of investing inthe fund is more than double what itappears to be at a quick glance.


Congress is now giving the mattersome attention, and has asked theGeneral Accounting Office to studythe situation. Critics say it's time tooverhaul the regulations on disclosingcosts. Noting that it's important toprovide investors with as much informationas possible, they believe thatincreased disclosure might changethe way investors select their fundsand the way portfolio managers runthem. Opponents, of course, say disclosurewould be confusing, and thatthere are too many variables used infiguring commissions to allow anapples-to-apples comparison.

In the absence of a quick fix tothe problem, doctors should bemore cost conscious and lookbeyond a fund's basic expense ratio.Brokerage commissions can oftenbe found in a fund's Statement ofAdditional Information, a largedocument that must be filed withthe SEC. To estimate the addedimpact of these brokerage tradingcosts, divide the fund's brokeragecommission cost for a year by theaverage net assets of the fund forthat period. If the number comesclose to or exceeds the expenseratio, you may want to considerinvesting elsewhere.