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Follow up:

My friend has Pioneer. They are worse.

I told him that his returns were 80% of the returns Pioneer claims to earn.

He asked, "So are you saying that Pioneer's fees are 20%"?

My Response:

No, well not really: Industry standard is that charges are a % of assets, but they can increase assets more and more as people give them money through 401k's etc. The other factor is the "load" either front-end or back, both are bad. What matters to you however is how much of the money that you "earned" (the amount in excess of the amount that you directly put in), will you actually be able to take away. In other words there is what they call a "total return", (what the fund claims to have "earned" you) and then there is the amount that you can put in the bank at the time of sale called redemption (excluding income taxes). The amount (again pre-tax) you can put in the bank is much less than the "total return". It is actually the total return less fees and expenses.

Therefore in response to, "So are you saying that pioneer's fees are 20%," the answer is no but yes. Technically they charge you something like 0.7% per year in expenses in combination with the front-load fee (4.5%? Or whatever it was) actually reduce the "total return" by 20%. So the answer is also yes your take-away return is actually 0.80 or 80% of the "total return".

Maybe an example:

You put in $10,000 and for ease, assume you never add to it. With the front load (say of 4.5%) you actually begin not with $10,000, but with $9550 because:
95.5% = (100% - 4.5%) and .955 x $10000 = 9550.

And from then on you are expensed each year at some seemingly marginal rate, but that is in essence cumulative and takes away from your take away returns as well.

So Lets assume they report to you that they earned 10% and they do this each year for 20 years. Your $10,000 should now be $67,275, which of course is an annual return of 10%.

This is a simple calculation which you could do with a constant rate of return, its just 10,000 x 1.10^20 (note ^20 is "to the 20th power")

So they can claim to have earned you 10%, but wait a minute, you began, not with $10,000, but with $9550 due to the front end load, which at 10% for 20 years would be $64,247.62

Yet there is still more since each year they are deducting the annual expense from your balance. So if for each year your funds go up by 10%, the 10% is immediately reduced by say 0.7% or 0.007. This may seem like a small number but over time this "frictional" cost is significant.

The end result is that they may claim to have earned you 10% annually, but after calculating the cumulative frictional costs and reducing the beginning balance by the front load fee, 10% is actually 10% x (1-.20) or 10% x .80 = 8%.

The result, the take away dollar amount (pre tax) from your $10,000 investment would be 46,609.57 not $67,275. Big difference! Oh and by the way, these funds WILL NOT EARN 10% ANYWAY and will be lucky to earn 8% before these expenses, but that is another discussion altogether.





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