How Much Is Your Portfolio Costing You?
A brief summary of investment fees and helpful strategies to avoid them
Like most things in life, investing is not free. Unfortunately, many investors do not realize the amount of fees they are paying. It is not necessarily investors’ fault. Some fees are obvious, while others take a little more effort to uncover. Below is a list of the most common types of fees:
Management/Advisory Fee: These fees are paid to the person or institution managing an investor’s portfolio. A fee-based upon assets under management (AUM) is the standard. A financial advisor will typically charge a percentage, or fraction thereof depending upon portfolio size, of the total assets being managed. This fee is generally paid monthly or quarterly. Carefully review your monthly statements or ask your advisor if you are being charged this fee.
Trading Fee: Trading fees are paid when a security is bought or sold. Many brokerage accounts have abandoned these fees for the more consumer (and marketing) friendly “commission-free trading” model. But some trading fees persist. If you are unsure about your investment account, review your monthly statements, search your broker’s website, or simply ask.
Brokerage Fees: These are the standard nuisance fees levied by a bank or other financial institution. These fees include withdrawal, wire transfer, monthly statement, account inactivity, etc. Investors can request a fee schedule from the financial institution. These fees are easily avoidable, but it is important to know what they are in order to do so. Review your monthly statements. If one pops up, request it be waived.
Mutual Fund Transaction Fee: There are essentially 2 types of mutual funds, “load” and “no-load.” “Load” is code for a fee. These fees are charged when an investor buys (front-end load), when an investor sells (back-end load, aka surrender charge), or throughout the time invested (level load). Before investing in a mutual fund that has a load, understand how the fee is charged as it will have a negative impact on the net return on your investment. This type of fee can be easily avoided by selecting a “no-load” mutual fund.
Mutual Fund Expense Ratio: Mutual fund expenses generally consist of three types of fees: management fees paid to the portfolio manager to run the investments, distribution fees paid to promote and market the fund, and administrative fees paid for the mutual fund’s operations (i.e. salaries, record-keeping, research, etc.) The total of all of these fees paid annually divided by the total assets in the fund equals the expense ratio. When analyzing mutual funds with similar investment mandates, it is important to compare the funds’ expense ratios. The lower the expenses, the greater the investors’ net-return.
Exchange-Traded Fund (ETF) Expense Ratio: ETFs have expense ratios. Comparing the expense ratio of funds with similar strategies is an effective way to reduce the related investment fees. Since ETFs trade like stocks, many brokerages offer commission-free trading on these securities.
Commissions: Commissions are charged on 3 types of products: mutual funds, insurance, and annuities. The amount of commission varies with the product being sold. If an advisor is pushing any of these products, do not hesitate to ask what they will earn should you take them up on their suggestion.
(Public service announcement: When working with a commission-based investment advisor, consumers run the risk the advisor is more interested in selling a product with a large commission rather than one that suits the investors’ needs. Investors should ask about the possible commission earned on every proposed investment. Understanding how the advisor is being compensated will provide some insight as to what will benefit more, the investor or the advisor.)
Taxes: While technically not a fee, taxes can have a negative impact on a portfolio’s total performance. It is important for advisors to manage investor portfolios in a tax-efficient manner. Fund selection, strategic account allocation, tax-loss harvesting, and minimizing taxable transactions are just a few of the strategies that should be considered when minimizing investment-related taxes. If unsure about how taxes are affecting your portfolio, discuss with your investment advisor or CPA.
Conclusion
There can be many fees associated with investing. However, by doing a little digging and asking some probing questions, investors should be able to identify and ultimately mitigate, the fees they are paying.
About the author:
JP Geisbauer is a Certified Public Accountant and a Certified Financial Planner ®. He is the founder of Centerpoint Financial Management, LLC, a retirement planning, investment management, and tax planning firm located in Irvine, CA. If you have specific questions regarding your situation, please schedule a complimentary 30-minute call here.
Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article constitutes financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, please consult with your financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.