Breaking Down Investment Fees and Commissions
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While an investment portfolio is great way to build wealth, many investors are unaware of the variety of fees that are a part of just about every investment one can make. Mutual funds, annuities, stocks, and essentially all other investment vehicles come with fees attached. Some fees show up only at the time of purchase and/or sale, but others are regular and ongoing. The better you understand the expenses attached to certain investments, the better choices you can make.
Here’s a look at some of the different hidden costs that you may run across in your investment portfolio:
Fund management fees and expense ratios
Putting together and running a fund—a mutual fund, for example—costs money, and that is reflected by an operating expense charge called a management fee. This is expressed in what is known as an expense ratio: the amount of money charged for operating expenses in relation to the amount of money invested. So, for instance, a fund with an expense ratio of 1 percent will charge one dollar for every $100 invested. That fee is paid by having the amount deducted from your investment return. All things being equal, the lower the expense ratio of the investment fund, the better it is for you.
Typically, every time your account buys or sells stocks, bonds, mutual fund shares, or just about any other form of tradable assets, a transaction fee is charged. The amount of the fee varies widely depending upon the brokerage firm, but it can range anywhere from $5 to $50 or more.
While a transaction fee should never prevent the making of an otherwise good investment decision, very active accounts can have their bottom line significantly impacted by these charges.
There are some online brokerages that don’t charge transaction fees on certain types of mutual funds and ETFs, but each brokerage is different, so be sure to inquire about which investments meet these criteria.
Some investments may include an upfront sales charge that goes to the salesperson. Common examples of these include the following:
Back-end loads are penalty fees that some mutual funds and annuities charge at the time of sale, depending on how long the investor holds the share. The fees usually amount to 5 percent or 6 percent of the sale price, with that amount declining over time until it eventually disappears completely. As is the case with front-end loads, this fee is in addition to the fund’s management fee charge.
Annual account fees
Some brokerage and mutual fund accounts charge an annual fee that ranges from $25 to $100. In an IRA, it’s often referred to as the custodian fee. The annual fee is on top of other fees and is difficult to distinguish from administrative management fees. Not all firms and funds charge an annual fee, so be sure to ask if yours does.
Minimum threshold or small account fees
Another fee that your brokerage firm may charge is a small account fee. Typically this fee is charged if your account doesn’t generate enough commissions or fees to meet the firm’s minimum threshold. This fee can range anywhere from $25 to $100 per year.
By knowing exactly where your investment money is going in the form of fees and commissions, you can make better personal financial choices and be certain your investment portfolio is getting the best bang for your hard-earned buck.
Jeff Rose is a certified financial planner and author of the blogs Good Financial Cents and Soldier of Finance. Learn more about his Roth IRA Movement that has inspired over 140 personal finance advisors to educate young adults on the importance of saving.
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