Here’s How Investment Fees Work

You have to pay for everything these days. Did you ever think the day would come where you would have to pay to talk to somebody? Banks, technical support lines, and many other places charge you to speak to a human being.

Don’t forget about the fees to check in a bag on a flight, fees to deposit money into a bank, and the many “convenience” fees that really aren’t all that convenient. Everything has a fee and that includes your investing activities.

If you’re not keeping careful track of the fees you pay to invest your money, maybe we can change your mind. Let’s look at the fees that you might be paying in the hopes of building wealth.

Mutual Fund Fees

We won’t take the time to explain each of these fees but there are plenty of them. Load fees, management fees, commissions, advertisement fees, redemption fees, and a lot of fees that the fund is paying that are passed on to you and each investor in the fund.

Remember that mutual fund managers have to pay each time they buy and sell in the fund and those commissions aren’t normally through a discount broker.

If you really dig into the commissions fund managers are paying to the investment banks, you would be shocked. Not all funds are bleeding money out in commissions but it’s worth looking at any fund you own.

Many insiders claim that these high fees are part of the much too friendly relationship between investment banks and their institutional clients.

In general, look for mutual funds that have total fees below 1%. Some funds may have a track record of long term outperformance. If that’s the case, paying a little more may be justified but don’t think that higher fees mean better performance.

Commissions

What if you’re a do it yourself investor? If you’re only making a handful of transactions per year, the commission charges won’t eat into your profits but if you’re a frequent trader, these costs could amount to a large amount of annual expense.

Remember this: We’re all working in the same stock market. Paying a higher fee to buy stocks in the same stock market doesn’t make sense.

The cheapest broker may not offer the services you need but in most cases, a discount broker that offers a low flat fee for your trades will save you money.

The larger investment banks charge large commissions but offer the same service. What if you saved $500 in commission annually?

Advisers

Skilled financial advisers are worth your time. If you’re not confident that you have the time to learn how to invest your own money, use a financial adviser.

Just like mutual funds, there are can be many fees attached to this service and to be fair, advisers should be compensated for their time just as you are compensated in your line of work.

Advisers come in two basic varieties: fee-based and commission-based. Some advisers are paid a commission when they put your money into certain mutual funds or other investment products.

Commission-based advisors have to maximize their commissions in order to make money which makes them vulnerable to not having your best financial interest at heart.

There are plenty of ethical commission-based advisers but remember that their compensation model doesn’t make it financially worth their while to act in your best interest all of the time.

Then there is the fee-only adviser. These advisers work by either charging a flat hourly or per service fee or they manage your investment portfolio and take a yearly percentage as a management fee.

Normally the fee is between .5% and 2% depending on your balance. The more money you have the less they will ask in management fees. This seems customer-unfriendly but remember that if you have a $10,000 balance, .5% would only be $500 per year, hardly enough for a financial adviser to live on since they can only take on a limited amount of clients.

Fee-only advisors have your best interest at heart because the better they do with your portfolio the more they make. There is also a fee-based advisers who is a mix of both types of advisers.

Finally

Remember that the taxes you pay on your earnings are also a fee. Don’t forget to factor that into your returns.

Photo by Christian Dubovan on Unsplash