Fee Obfuscation Is a Thriving Art

Fee obfuscation is a thriving art. No one can make you pay attention, but I can tell you it would be a good idea.

It’s Fidelity this time. It could be Wells Fargo, Merrill Lynch, Charles Schwab, or others next time.

A recently opened investigation of Fidelity for charging an “infrastructure fee” to the mutual funds operating on its platform prompted the writing of this short note on fees.

Fidelity charges mutual fund managers 0.15% to compensate them for what they call “unsustainable economics” related to low-cost mutual funds. The Labor Department doesn’t have an issue with the fee itself but rather that it may not have been disclosed to investors.

According to the Wall Street Journal (February 27, 2019), the document outlining the infrastructure fee, “Fidelity FundsNetwork Business & Services Guide,” is “not to be distributed to the public as sales material in oral or written form,” and “may not be shared with any third party.”

This raises a couple thoughts on fees.

First, no one likes fees. Whether it’s a dubious processing fee, or an overdraft fee, no one enjoys an unfamiliar (or worse, unnoticed) hand dipping into their wallet. Second, I find obfuscated investment fees to be the most insidious and detrimental to long-term financial success.

It is unfortunate that the investment industry has a long history of rendering fee disclosures unintelligible.

I must admit that fees are a sensitive subject for me. As an advisor, I charge an asset-based fee to help clients invest and meet their long-term objectives. At the same time, our philosophy at ProffittGoodson is to drive all-in costs as low as possible.

My issues with fees are principally two-fold – I don’t think investors pay enough attention to fees, and I believe the investment industry gets away with an egregious amount of fee obfuscation.

In a 1991 article in the Financial Analyst Journal, William F. Sharpe contends that “under plausible conditions, a person saving for retirement who chooses low-cost investments could have a standard of living throughout retirement more than 20% higher than that of a comparable investor in high-cost investments.”

John C. Bogle (2014) updated this article, arguing that “compared with costly actively managed funds, over time, low-cost index funds create extra wealth of 65% for retirement plan investors.”

The paper is “The Arithmetic of “All-In” Investment Expenses” and every investor ought to be aware of his or her all-in investment expenses.

It makes little sense to invest so much time to one’s career, the primary source of income during the accumulation phase of life, and often so little to what will become the primary source during the retirement phase.

All else equal, higher costs translate to lower performance. No arithmetic required.  

Some argue active mutual funds can outperform the market. And some do. But it’s incredibly difficult to pick those managers in advance. Not only is distinguishing skill from luck a problematic exercise, but it’s difficult for even the best managers to persistently outperform after fees, transaction costs, and taxes. A wealth of data shows that, in aggregate, active mutual fund managers do not outperform their benchmarks (S&P Dow Jones Indices, 2018).

At ProffittGoodson, we pride ourselves on the transparency we provide, whether it’s with regards to fees, account performance, or appropriate benchmarking. We are committed to a holistic approach to wealth management, always working to minimize the layering of fees.

On that note, here is an inexhaustive list of fees that investors may be paying:

  1. Management Fees

  2. Administration Fees

    Custody fees

    Depository fees

    Registration fees

  3. Marketing and Distribution Costs

  4. Trading Costs

    Commission (explicit)

    Bid-offer spread (implicit)

    Market impact (implicit)

    Delay costs (implicit)

  5. Performance fees

Many of these are embedded inside the plethora of vehicles providing investment exposure. Awareness is only the first step.

A reliable heuristic is that the more complicated the product, the more money is being made (by someone other than you).

If this is confusing to you, and there’s no reason it shouldn’t be, give me a call and let us pull your portfolio cost structure apart.

For inquiries or to suggest future topics, please email me at bgoodson@proffittgoodson.com

Best regards,


Morgenson, Gretchen. 2019, February 27. “Government Probes Fidelity Over Obscure Mutual-Fund Fees.” https://www.wsj.com/articles/fidelitys-fees-on-low-cost-funds-eyed-in-government-probe-11551263401

Bogle, John C. 2014. “The Arithmetic of “All-in” Investment Expenses.” Financial Analyst Journal, vol 70, no. 1.

Sharpe, William F. 1991. “The Arithmetic of Investment Expenses.” Financial Analyst Journal, vol 69. no. 2

Soe, Aye M., and Berlinda Liu. 2018. “SPIVA U.S. Scorecard.” S&P Dow Jones Indices. https://us.spindices.com/resource-center/thought-leadership/spiva/