What Your Stock Broker Costs You

[AFA] Knowledge...Understanding

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The American Institute of Certified Public Accountants Explains Where You Should Look

Stock brokers and fund mangers claim to find market inefficiencies that offer opportunities to "beat the market"… True or not, the cost of trying to exploit these is likely to exceed the benefits of doing so. Following are excerpts from an eye-opening study, published in the Journal of the American Institute of Certified Public Accountants (January 2000), which documents these substantial costs you may be paying.

The SEC requires mutual fund prospectuses to provide expense information generally limited to the fund's operating expense ratio and any 12b-1 charges (essentially marketing expenses the fund passes on to investors). Unfortunately, these expenses are just some of the costs investment managers impose on investors.

Funds actually incur five types of annual expenses:

Operating expenses and distribution fees.
The cost of cash.
Trading expenses.
Market impact costs.
Taxes.

2. Costs of Market Timing and Stock Picking Make Sustained Outperformance Impossible

COSTS SEC REQUIRES MUTUAL FUNDS TO REPORT IN PROSPECTUS:
Sales Commission or Loads	Up front or deferred transfer of investor's money directly from investor to sales person	0.0%- 6.0%
Operating Expense Ratio	Depending on Asset Class and Fund	0.2% -3.0%
12b-1 Fees	Marketing costs passed on to investor	0.0% - 0.5%
OTHER COSTS INVESTMENT MANAGERS IMPOSE ON INVESTORS:
Operating Expenses & Distribution Costs	e.g., payment to Schwab for being offered "commission free" as a Schwab One fund	0% - 1% +
Trading Expenses	Buying or selling shares costs about 1% each way, or 2% times fund's annual turnover ratio	0.1% - 3%
Cost of Cash	Cash held for timing is not generating returns	1% or more
Market Impact	In less liquid markets a buy order pushes prices up to attract enough sellers. Selling also impacts	0% - over 6%
TAXES	Trading generates taxes sometimes without a profit to cover them	1% - 15%

SOURCE: AICPA Journal of Accountancy, January 2000

The American Institute of Certified Public Accountants Explains Where You Should Look
Costs of Market Timing and Stock Picking Make Sustained Outperformance Impossible
Partial Illustration of Fees and Expenses at a Sampling of Mutual Funds
Illustration of How Management Fees and Expenses May Cost You Your Nest Egg

The American Institute of Certified Public Accountants Explains Where You Should Look

2. Costs of Market Timing and Stock Picking Make Sustained Outperformance Impossible

COSTS SEC REQUIRES MUTUAL FUNDS TO REPORT IN PROSPECTUS:

OTHER COSTS INVESTMENT MANAGERS IMPOSE ON INVESTORS: