Investors are understandably eager to earn high returns. But nothing erodes that eagerness or kills the investor’s confidence in his or her advisers like a plethora of investment fees that eat away at those gains.
That’s one reason investors are paying a lot more attention to fees these days, according to Ram Subramaniam, head of products at TD Ameritrade, an online stock brokerage firm in Omaha, Neb.
“Any fee is getting more scrutiny, partly because the market returns aren’t as attractive as they were,” he says. “People are conscious and aware of what they’re paying. What you pay in fees eventually impacts your return.”
Here’s what to look for in investment fees and what to do about it.
Examples include account maintenance fees, mutual fund management fees, trading fees or commissions, and investment management fees. Some are for services such as investment advice. Others are tied to activities such as buying or selling stocks, bonds or options. Still others are charged “just for the privilege of keeping your money there,” Subramaniam says.
Investment fees can be structured as a flat rate per month, per year, per trade or as a percentage of account assets or the transaction amount. For example, an annual account maintenance fee might be $100 or 1 percent of assets. A trade might cost $9.95 or involve a commission based on the price and number of shares. Some companies charge lower fees for trades entered online and higher fees for trades placed with the assistance of a telephone operator or stockbroker, according to a Bankrate chart of brokerage companies’ charges.
Mutual fund companies also charge fees that vary in structure and amount, according to Justin Krane, president of Krane Financial Solutions, a financial planning firm in Los Angeles.
“When you’re buying a mutual fund, you have to pay for professional management, and there are commissions to buy or sell. Those could be as little as $8 or as much as 2 percent, or 5 percent for a load fund,” Krane says.
The term “load” means the investor pays the fund company an upfront and/or back-end percentage in addition to the broker’s transaction fee or commission, if any. These deals typically are highlighted on lists of so-called select or premium funds.
A no transaction-fee fund might be a good choice, but investors should understand that fund companies also typically pay a promotional fee to the brokerage company. As a result, that fund’s expense ratio might be higher because those behind-the-scenes fees are wrapped into the fund’s costs, Krane says.
Many investors also pay additional investment fees to financial advisers.
Krane says some advisers earn commissions on the products they sell you, others are only paid a fee by their clients, and still others collect commissions and fees. Financial advisers who act solely in their client’s interest generally are compensated on a fee-only basis. The term “fee-based” generally means the adviser receives a mix of fees and commission.
“The client needs to know,” Krane says. “Granted, I’m paying you a fee, but in what capacity am I paying you? Are you operating as a fiduciary or salesperson? The financial planning community is going for a fee-only model. The Wall Street community wants fee-based.”
Savvy investors can save money on fees. Here are four tips:
“The more information and power investors have, the better decisions they will make about fees,” Subramaniam says.
“If there is a better fund where there is a lower expense ratio and where you can pay the $35 versus something that has a lower fee, maybe you should do that,” Krane says.