Planning & Investment Costs Can Be Lower Than You Think

Securities Lending Reduces Some Mutual Fund Expense Ratios

Many investors do not realize that by lending limited amounts of select, hard-to-borrow securities that are in high demand, mutual funds generate revenue that can then be passed on to shareholders. This results in a lower net expense ratio.

Take the DFA US Core Equity 2 fund for example. The current expense ratio is .22% but in 2012 the fund made roughly .09% on securities lending and this money was added back to the fund so the actual net cost to investors was approximately .13% or 41% less than the stated expense ratio. Fund companies like DFA and Vanguard pass on 100% of lending profits to their fund shareholders which further reduces their already very low expense ratios.

Financial Planning and Investment Management Fees Are Often Tax Deductible

If you are in a 35% tax bracket and pay a fully deductible $10,000 fee, you will receive a $3,500 refund on your taxes resulting in a net cost of $6,500. If your fees are only partially deductible or not deductible at all for Federal income tax purposes, you should still get a State tax deduction. If some of the planning you do involves one of your businesses, consider paying part of your fee from the business. This will make that portion of the fee 100% deductible to the business.

Fees Paid From IRAs Do Not Trigger Taxable Income

If you are close to retirement or already withdrawing money from your IRAs for living expenses, it may make sense to have your fees deducted directly from your IRA. This is especially true if your fees are not fully deductible on your tax return. For example if your fee was $6,500 and you were in a 35% tax bracket, you would have to withdraw $10,000 from your IRA to have $6,500 left after taxes to pay the fee. If on the other hand, you had the fee deducted directly from your IRA, you would only have to deduct $6,500, since the fee deduction is not considered a withdrawal for tax purposes.

We normally only recommend this for retired clients or those approaching retirement whose fees are not deductible on their tax returns. It is also important to remember that you should only deduct fees from an IRA account that were paid to manage that specific IRA.