From management fees to load fees, the costs associated with investing can quietly chip away at your returns, often going unnoticed until they’ve compounded into a significant impact. The difference between a portfolio’s performance with and without these fees can be staggering over time, making it essential for investors to understand and manage these expenses effectively. This is something that a financial advisor can help you with. Here’s what you need to know.
Types of Investment Fees
Investment fees can range from management charges to trading costs, and eat into your investment returns over time. Here are five common types of fees to pay attention to:
- Management fees: The fee you pay for the expertise of an advisor or manager to manage your investments is known as a management fee, which is typically a percentage of your assets under management (AUM). These fees can vary, often ranging from 0.25% to over 2% annually or more, and they directly affect your investment’s growth. For example, if you have a $100,000 portfolio with a 1% management fee, you’d pay $1,000 yearly. Over 20 years, with a 7% return, your portfolio could grow to $286,768 with the fees, as opposed to $324,340 without them.
- Fees per trade: Every time you buy or sell a security, you may incur a fee known as a trade commission. These fees can vary dramatically, with some online platforms offering zero-commission trades, while full-service brokers may charge more for additional services. If you’re an active trader, these fees can accumulate quickly, potentially eating into your returns. For example, if you make 100 trades a year at $10 each, you’re looking at $1,000 in fees, irrespective of your trading success.
- Expense ratio: When you invest in mutual funds or ETFs, you’re also paying an annual fee known as the expense ratio. This fee, which is a percentage of the fund’s assets, covers the operational costs, management, and other administrative expenses. For example, a fund with a 0.75% expense ratio will charge you 75 cents annually for every $100 invested. Actively managed funds typically have higher expense ratios when compared with index funds, reflecting the cost of active management.
- Transfer fees: Transfer fees come into play when you move your investments from one institution to another. These fees can arise from various actions, such as changing brokerages or rolling over retirement accounts.
- Load fees: Load fees are specific to mutual funds and are charged when you buy or sell fund shares. Front-end loads are taken at the time of purchase, while back-end loads, or deferred sales charges, diminish over time and may eventually disappear.
Strategies to Lower Investment Fees
To minimize fees eating into your returns, it’s essential to employ a range of strategies tailored to your specific finances. Here are four common ways to help you do this:
1. Review All Statements
Reviewing your investment statements regularly can lead to significant savings. This will help you keep track with any changes in fee structures or unexpected charges, and ensure that you’re not paying for unnecessary services.
When reviewing your statements, look for patterns in fees, check for services you don’t use, and compare costs with other platforms or services. A checklist for statement review could include: identifying each fee type, confirming the necessity of each service and comparing fees with industry averages.
2. Reduce Your Trading Activity
Depending on the trades you’re making, many investments can cost you fees every time you buy or sell an asset. Frequent trading can lead to a pile-up of transaction fees, which chip away at your returns. By consolidating trades or setting specific trading windows, you can decrease the number of transactions and, consequently, the fees. It’s important to know what fees you’ll be paying when you trade before doing so in order to plan out your investment frequency.
3. Consider Alternative Investments
Diversifying your portfolio with alternative investments like index funds or ETFs, which typically have lower fees than actively managed funds, can be a smart move. For example, the average expense ratio (which is the average percentage of a fund’s assets that are used to cover operating expenses) for an actively managed mutual fund is around 0.67%, whereas index funds and ETFs can be as low as 0.03%. A comparison table of fees from various investment types can help you visualize the potential savings.
4. Work With a Financial Advisor
A financial advisor can help you lower investment fees by recommending low-cost investment options such as index funds or ETFs, negotiate fee reductions with fund providers, consolidate assets to qualify for lower fee structures and provide guidance on cost-effective investment strategies that are tailored to your financial goals and risk tolerance. But, before hiring a financial advisor, take into account the fees that they will charge for their services and how they can specifically help you optimize a portfolio to minimize overall investment fees.
Bottom Line
From management and trade fees to expense ratios and load fees, each fee can eat into your returns. By employing strategies such as regularly reviewing statements, reducing trading frequency, considering alternative investments and possibly working with a financial advisor, you can optimize your investments to mitigate these fees.
Tips for Investing
- A financial advisor can help optimize your investment portfolio so that you are not spending as much in investment fees. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re curious about how your chosen portfolio could change over time, consider using an investment calculator.
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