Fees are a really big deal in the investing world. For the past several years there has been a race to the bottom for companies reducing their investing fees. In fact, now there are a lot of trading platforms that do not charge fees at all (for given types of trades). But the gambit of fees can be confusing to most people (including seasoned investors). So let me break down the five common investment fees and a maximum of how much you should be paying toward them.
Management Fees
This is the most common of all the investment fees. When you pay someone else to manage your investments, that person is due compensation for that.
So a management fee can come in the form of a financial advisory fee or as a management fee from the specific fund.
For example, if you work with an advisory, they will probably charge you some form of fee as a percentage of your portfolio. That fee is the management fee.
Management fees range across the industry but average about 1% of the size of the portfolio per year.
So if your portfolio is $100,000 with a 1% management fee, you pay $1,000 in fees for the year.
If the portfolio does well the next year and grows to $110,000, the management fee would be $1,100.
If the portfolio were to do poorly and shrink to $90,000, then the management fee would be $900. (Yes, you still have to pay management fees if the portfolio were to go down.
Trading Fees
The next of the common investment fees are trading fees.
Not all brokerage houses charge trading fees.
A trading fee is a fee that is incurred as a commission for buying or selling a specific financial instrument (usually a stock or derivative).
Trading fees are not common as they once were since the rise of mutual funds, ETFs, and index funds, but there are still scenarios where you might have to pay them.
Expense Ratio
If you invest in different mutual funds, ETFs, or index funds instead of going with an advisor, they will have their own management fees. These are called expense ratios
Those fees can range from about 0.01% to about 2.00%.
Generally, index funds and ETFs are going to have really low management fees and mutual funds (especially the more specialized mutual funds) will have higher management fees.
The expense ratio pays for the funds operating expenses (salaries, healthcare, office supplies, computers, tech, advertisement, etc.).
These fees can (and in my opinion) should be very low.
In fact, there are some ETFs that do not even have an expense ratio at all.
Sales Charge
The next of the common investment fees are sales charges.
Sales charges are used for the purchasing of mutual funds. Typically, there is a commission for selling a mutual fund. It can be paid on the front end (when you purchase), or on the back end (when you sell).
These aren’t as common since the rise of ETFs but are certainly still out there. In fact, this is one of the places where financial advisors have made a bad name for themselves.
Some financial (non-fiduciary) advisors simply want to sell products to people to earn the commission.
Transfer Fee
Transfer fees are generally pretty small. I have never seen a transfer fee of more than $100.
A transfer fee is basically a wire fee. If you choose to move your money from one broker to another, from a bank to a mortgage company, or similar situation, it will generally be done through a wire.
These fees will depend on the financial institution that is changing them. But as I said, I have never seen a transfer fee of more than $100.
How Much Should I Pay?
This is a tricky question because everyone has a different situation and different needs and desires.
However, I generally advise people that they should not pay more than 1.25% in fees. Why 1.25% you may ask?
Generally, I think it is acceptable (when working with a financial advisor) to pay a flat 1% management fee. The advisor is looking at your entire financial picture and they are there to manage your money as well as help you work through tax implications and unusual circumstances and they should be compensated for that. 1% is a fair rate for their expertise should you elect to use an advisor.
The extra .25% is for any additional fees that you might incur as part of your portfolio (as discussed before).
The .25% is a very low number. And that is for good reason. You should not be paying very many (if any at all) fees above the management fee for your investing dollars.
If it were me, I would try to keep ALL fees to a total of <1.00%.
Final Thoughts
If you are not careful, investment fees can really eat away the returns of your investments.
Yes, the professionals who manage these funds and who manage your individual portfolio deserve to be compensated. But do your best to limit the amount of money that leaks out of your wallet every month.
And do whatever you can to keep the maximum amount you pay in fees to <1.00%.
You can do this!
Until next time!
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