A complete guide to investment fees

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After you’ve made the wise decision to invest your money, a portion of it will likely go towards fees, which bites into your returns. Whether it’s to maintain your account, make trades or pay an expert like a financial adviser, fees exist.

The size of the fees you’ll pay, however, depend on the type of account you open, the type of company or firm you choose and how much money you have to invest. Here’s a rundown of where you’ll find fees, plus advice on how to choose a financial services firm that’s right for you while keeping your investment fees to a minimum.

What are investment fees?

Investment fees are what you pay a company or financial professional to use their services or products. Whether it’s to set up your plan, give you investing advice or make changes to your portfolio, you need to pay for those things to happen.

John O’Rourke, Vice President of Private Banking and Wealth Advisor at First American Bank, says it’s compensation investors pay for time and expertise.

“Registered investment advisers, either an individual or a group, are compensated for the services they provide,” O’Rourke says. “Securities analysis, investment recommendations and portfolio management are some of the services they typically provided.”

Fees can either be flat — a fixed charge that you pay the adviser or broker for specific services such as, say, setting up a financial plan — or a “fee-only” setup used by planners who take a percentage of the assets they manage for you.  So-called “fee-only” planners earn a certain amount of money based on how much money you have invested with them and the earnings on your investments. Charging a fee based on assets under management (AUM) is becoming increasingly common in the financial services world.

O’Rourke says First American Bank, for example, has a fee schedule where the percentage decreases as your assets held at the firm, or AUM, rise:

  • 1 percent up to $3 million
  • 0.80 percent for $3 million to $5 million
  • 0.60 percent for $5 million to $10 million
  • 0.50 percent for $10 million

That means if you have $1 million in your account, the annual fee charged by your advisor would be $10,000.

What are the different types of investment fees?

Investment fees come in many different forms, depending on the firm you choose and the type of account you open. While financial advisers charge fees for their advice, do-it-yourself investors also will be confronted with management fees and other types of charges levied by a fund, such as a mutual fund or exchange traded fund, that they buy and sell on their own.

Investment advisor fees

Investment advisers that manage your money can earn money in other ways, like:

Fee-only: These are financial advisers and planners who only earn money through fees you pay based on the dollar amount of assets you have invested. Fee-only planners can also charge you an hourly or flat rate for specific services, such as creating a financial plan. Fee-only planners are considered fiduciaries, or professionals bound to act in the best interest of their client. It removes conflict of interest since they aren’t collecting any extra money when their clients buy a certain product they recommend.

Fee-based: These advisors make money through the fees you pay as the client, but also have the opportunity to earn money in other ways. For instance, if you buy a certain stock or mutual fund that your adviser recommends, they may earn commission on that deal.

In short, you’re not just paying for your investment adviser’s time.

Mutual fund fees

When you open a mutual fund account you’ll have a choice between funds that charge commissions, or loads, and those that don’t. A load mutual fund is one that charges a sales commission for the shares you buy and sell. Sometimes you may pay an upfront fee, or “front-end” load, where you’re charged a commission when you put money into your account and purchase fund shares. This fee lowers the amount of money that’s actually invested in your fund. Then there’s a “back-end” load, where you’re charged a fee when you take money out of your account, or redeem your shares. Back-end loads normally decrease each year an investor remains in a fund, according to Morningstar.

A no-load mutual fund means there’s no extra charge when you buy or sell shares. Keep in mind, however, that even “no load” does not mean there aren’t other fees.

“With these types of [no-load] mutual funds, you are essentially going it on your own, forgoing professional investment advice and thus avoid paying a commission,” O’Rourke says. “[But] there is no such thing as a free lunch, and all mutual funds have additional built-in costs.”

Adds O’Rourke, “There are a variety of annualized costs associated with running a mutual fund. Just like running a business.”

Most mutual funds include three types of fees that make up expense ratios:

  1. Management fees: Paid to the portfolio manager and their team.
  2. Distribution or service fees: This is used to promote the fund.
  3. Administrative and operating fees: Typically paid to fund managers, operations staff, research and recordkeeping and overall operations.

Depending on the account you open and your chosen firm, you could see other fees, including:

  • Account closing fee: Charged when you close your account and transfer funds to another firm.
  • Withdrawal fee: Usually made when you make a withdrawal from an ATM that isn’t authorized by the bank or brokerage firm.
  • Insufficient funds fee: If you’ve made an overdraft, you could see a charge for not having enough money in your account during the transaction.
  • Transaction fee: Some companies have a flat fee — either a dollar amount or percentage of money in your account — they charge every time you make a transaction.
  • Phone transfer fee: Many times, making transfers online can be free while calling to speak to a customer service representative may cost you.
  • Monthly statement fee: If you opt into getting your statement mailed to you — instead of electronically — it could cost you extra.

How to avoid certain investment fees

For some accounts, there’s no getting around the fees you’re charged. Which means it’s up to you to choose the best account for you. O’Rourke says it has a lot to do with how much money you have to invest.

“Most investment advisers will require at least $250,000 to allocate and manage a client’s account properly,” he says. “Some online brokerage houses offer transaction [fee-] free mutual funds and ETFs. Just make sure you are clear about the loads and expense ratios of the funds you are investing in.”

If you don’t have enough capital to invest in a brokerage account or with an adviser, that doesn’t mean you can’t invest at all.

There are many low-cost investment options to consider. Index funds and exchange traded funds, or ETFs, for example, offer broad diversification with very low fees, sometimes as low as zero percent with no transaction fees. Investors seeking low minimum investments might also consider diversified portfolios constructed by so-called robo-advisors. These digital advisors use computer algorithms and little or no human intervention to create a portfolio for you based on you risk tolerance and time horizon.

“Online robo-advisers are another consideration and typically charge 0.25 percent to oversee low-cost ETFs,” O’Rourke says. “And low-cost target-date funds are yet another option. They provide a diverse asset allocation of stocks and bonds based upon one’s target retirement date.”

Regardless of your choice, it’s important to compare them based on your investment style, desired return on investment and the type and size of fee that bests suits you. Remember, the amount you pay in fees is determined by your investment choices and the type of advisory relationship you’re most comfortable with.  So, check out each firm or company and the fees they charge before you make a decision.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Edited by
Megan Harney
Audience development editor