What are Investment Fees
Investment fees, such as trading, broker, and expense ratios, are charges for using financial products. Investment fees are one of the most influential factors in investment performance and should be considered by every investor.
Minimizing fees tends to maximize performance over time. However, it is critical not to let fees dictate your investment decisions.
Types of Investment Fees
To cover the costs of research and choosing investments for the fund, investment management charges are deducted from the value of your investment. Investment fees are a component of the overall cost of investing. However, the amount you pay for those fees does make a difference, particularly in the following situations:
Account maintenance fees
This is usually an annual fee, and it’s not very huge. It’s usually less than $100, and it’s not charged on all accounts. They charge this fee if your portfolio exceeds a specific dollar amount or if you make more than a certain number of trades per year.
The cost may be high if your account has a low balance. If you maintain a $10,000 account for a $50 yearly maintenance fee, then the maintenance fee is 0.5% of your balance.
Commissions
Some discount brokerages charge less than $10 per trade or a fixed amount plus a percentage of the trade at full-service firms. Depending on the broker you’re working with, it will be higher on certain types of mutual funds or ETF trades.
Mutual fund loads
The commission charged on the sale or purchase of a mutual fund is called a ‘load.’ The load is a payment for the time and expertise spent by a sales intermediary in selecting the best fund for the investor. The load compensates the sales intermediary, such as a financial planner, broker, or investment advisor.
12b-1 fees
A 12b-1 fee is a fee that mutual fund companies can charge against assets to cover marketing, distribution, and administrative expenses. These fees are added to investment management fees to calculate the total expense ratio of a fund. Investors should be aware of these fees and how they affect fund performance. Because even if they do not pay this fee out of their pocket, it still may affect their performance.
Advisor fees
Some investors prefer not to manage their investments and are willing to pay professionals. Of course, there is a fee for this service, which can be a considerable amount. Management fees can be a fixed amount, a percentage of the account’s value, or a combination of the two.
Why Do Investment Fees Matter?
Investment costs may not appear to be significant, but they add up over time, compounding along with your investment returns. In other words, you don’t just lose the small number of fees you pay; you also lose any future growth that money could have had.
Assume you have $100,000 to invest. If the account earned 6% per year for the next 20 years with no costs or fees, the account would be worth around $320,000.
If, on the other hand, you paid 2% in costs per year, you’d only have about $219,000 after 20 years.
That’s correct: The 2% you paid each year would deplete nearly 30% of your account value. 2% no longer seems so insignificant.
How to Reduce Investment Fees
- Look for brokerage accounts that do not charge an annual maintenance fee or at least one that allows you to waive the fee.
- If you are a frequent trader, look for a discount broker with the lowest transaction fees.
- If you invest in mutual funds, stick with no-load funds or look into ETFs for lower fees.
- Read the 12b-1 fees in a mutual fund prospectus carefully. They can range from 0.25% to 1.00% of the fund’s value and are calculated annually.
- Use an investment manager only if you have no prior experience with investing. Even so, think about doing it yourself with index funds.