Remember, any worthwhile investment advisor should be willing to explain, in plain English, all investment fees that will be paid. When inquiring about investment fees, if someone says, My company pays me, get more details. You have a right to know what you are paying, and how someone is being compensated for recommending an investment to you.
It costs money to put together a mutual fund. To pay these costs, mutual funds charge operating expenses. The total cost of the fund is expressed as an expense ratio.
The expense ratio is not deducted from your account, rather the investment return you receive is already net of the fees.
Example: Think about a mutual fund like a big batch of cookie dough; operating expenses get pinched out of the dough each year. The remaining dough is divided in to cookies, or shares. The value of each share is slightly less because the fees were already taken out.
It is best to look at expenses in terms of your entire portfolio of mutual funds. You can build a great portfolio of index funds and pay no more than .50% a year in mutual fund operating expenses.
Investment management fees are charged as a percentage of the total assets managed. These types of fees can often be at least partially paid with pretax or tax deductible dollars.
Example: An investment advisor who charges 1% means that for every $100,000 invested, you will pay $1,000 per year in advisory fees. This fee is most commonly debited from your account each quarter; in this example it would be $250 per quarter.
Many advisors or brokerage firms charge fees much higher than 1% a year, and some combine these higher fees and then inside your account also use high fee mutual funds! It is typical for smaller accounts to pay higher fees (as much as 1.75%) but if you have a larger portfolio size ($500k or more) and are paying fees in excess of 1% then you better be getting additional services included in addition to investment management. Additional services would include comprehensive financial planning and/or tax projections for example
Many brokerage accounts charge a transaction fee each time an order to buy or sell a mutual fund or stock is placed. These fees can range from $9.95 per trade to over $50 per trade.
If you are investing small amounts of money, these fees add up quickly.
Example: A $50 transaction fee on a $5,000 investment is 1%. A $50 transaction on $50,000 is only .10%, which is very minimal.
A share mutual funds charge a front end load, or commission, in addition to the ongoing operating expenses.
Example: If you were to buy a fund that has a front end load of 5%, it works like this: You buy shares at $10.00 per share, but the very next day your shares are only worth $9.50, because .50 cents per share was charged as a front end load.
B share mutual funds charge a back end load, or surrender charge, in addition to the ongoing operating expenses.
A back end load, or fee, is charged at the time you sell your fund. This fee usually decreases for each successive year you own the fund.
Example: The fund may charge you a 5% back end load if you sell it in year one, a 4% fee if sold in year two, a 3% fee if sold in year three, and so on.
Variable annuities and index annuities often have hefty surrender charges. This is because these products often pay large up front commissions to the folks selling them. If you cash out of the product early the insurance company has to have a way to get back the commissions they already paid. If you own the product long enough the insurance company recoups its marketing costs over time.
Brokerage accounts and mutual funds accounts may charge an annual account fee, which can range from $25 – $90 per year.
In the case of retirement accounts such as IRA’s, there is usually an annual custodian fee, which covers the IRS reporting that is required on these types of accounts. This fee typically ranges from $10 – $50 per year.
Most of the time if you are working with a financial advisor that charges a percentage of assets these annual account fees are waived. Read more…