I Don’t Pay For My Investments…Wait, I’m Paying How Much???

 

Question:  Do you know how much you are paying in fees in your investments accounts each year?

Unfortunately for most investors this is not an easy question to answer, so here is a quick summary of the ABCs of investment fees:

Account/Custodial Fee:  An annual fee may be charged by the financial institutional holding your accounts, known as your custodian.  This fee may range from $20-$100 per year and covers reporting requirements and other administrative fees.

Commission:  A commission may be paid to your advisor when trades are placed in your account based on his/her recommendations of certain investment products.

Expense Ratio:  This cost is unavoidable if you are invested in ETFs or mutual funds and cover the administrative fees and operating expenses of the portfolio.  The expense ratio is usually higher in funds that are actively managed and lower in index funds and ETFs that track an index that are passively managed.  For example, if you have $10,000 invested in a mutual fund with a .50% expense ratio, approximately $50/year will go towards the operating expenses of the fund.  You will not see this fee debited from your account, but it is instead reflected in your investment return.

Flat Fee:  A flat fee may be charged by your advisor for financial planning work and ongoing financial planning needs.  Fees can be charged on a one-time basis or an hourly project basis depending on the client need.

Load:  Unlike expense ratios, load charges are totally avoidable. They are essentially a sales charge, paid by the investor to compensate the broker or salesperson who sold the fund.

Front End Load (A Shares): An upfront sales charge included in your initial investment purchase.

Back End Load (B Shares): This fee is charged to you when the fund is sold.  The fee is usually higher if the fund is sold within the first year of purchase and decreases over time.

Level Load: No upfront charge but there is a fee if the fund is sold within the first year.

Management/Advisory Fee:  This fee is for the management of your investment account and in most cases is usually charged as a percentage of your assets that are managed and may be deducted directly from your investment account on a quarterly basis.  For example, if your managed portfolio has a balance of $500,000 and you are charged 1.5% your annual estimated management fee would be $7,500 (or $1,875 per quarter).  You will see this amount deducted from your account on your quarterly custodial statement.

Transaction Fee:  Many financial institutions will charge a fee each time a trade is placed.  The fees can range from around $8/trade to upwards of $35/trade and the costs will be described in details on the fee schedule that can be found on the financial institution’s website.  Be sure to pay close attention to the fees that will be incurred for each transaction type as the charges can start to add up.

Confused yet?  The bottom line is that there is always a cost to investing; the more you are paying in fees the less you get to keep, resulting in less money available to meet your financial goals (spending in retirement, purchasing a new home, paying for college for your children).  The cheapest option may not always be the best option, but the first step is to understand what you are paying.  Ask your investment advisor to detail the fees you have paid this year, research the mutual funds or ETFs you hold in your portfolio on an investment research website like www.Morningstar.com, or have an independent review of your investments to understand how to make your money work better for you.