Nobody likes paying fees for anything. And this remains especially true when we invest. Fees charged on mutual funds are one of those areas that people absolutely hate. This is partially because expense fees on investment funds are essentially hidden from the investor unless they are front-end or back-end load fees. But for the vast majority of people, the expense ratio of 1% (or more often less) is something that gets paid through the investment and not out of pocket by the investor.

This begs the question: if the expense fee is something the investor does not have to physically pay (and therefore "feel" the pain of making that payment) should investors even care about the fees that are paid on investment funds? There are several arguments one way or the other and with the recent attention that the SEC has paid to investment fund fees, it is obvious that investors, at the very least, need to be aware of fees that they pay through their investments.

Arguments For Caring About the Existing Fee Structure

As noted above, the SEC is looking at setting rules and restructuring how fees paid to fund companies are not only report but charged. In one of their more aggressive recommendations in their 250-page proposal, the SEC plans on limiting the total amount a company can actually collect from investors. Put simply, the most they could collect as an expense ratio would be a collective 6.25% or less. This means that if you hold a fund with an expense ratio of 1%, you would be done "paying" after six years and three months (there are some fees that would continue, such as administrative fees incurred by the company, like trading fees and salaries, etc.). Compare that to today's rules that would allow a company to collect double- or even triple digit expenses if you held the fund long enough!

So for buy and hold investors, knowing about your fees is important and the SEC wants to protect these investors from paying eternally.

Arguments Against Caring About Fees

Some people fear that changing the existing fee structure, which is ultimately the same (or close to it) from one advisor to the next, will lead advisors to setting their own fees, such as through account management fees. This type of fee is standard for brokers and many planners. And while it could make sense because any additional expenses are paid through your management fee, it also means that advisors will become more like brokers who target only the highest net worth customers. The problem is that the low- and mid-range investors will lose out on obtaining top-notch advice because their accounts will not meet certain minimums.

As well, even at 1%, expense ratios are really not all that high when you consider the level of expertise one gets through an investment fund. For someone with less than $250,000, this is tough to beat. By changing fees, investors with little or no knowledge will be stuck investing a $250,000 on their own, which could impact their long-term goals and lifestyle aspirations.

Summary

There are several arguments one way or the other. The point is really that the SEC believes people should be better protected, an indication that they are not properly looked after now or that the investment industry is earning way too much off the backs of average people. Knowing about fees, regardless of how one feels about the proposed SEC changes, is ultimately worthwhile for every investor.