Investment Fees To Ask About Before You Invest
Always ask for details on investment fees.
Before you invest, take the time to understand all the investment fees associated with your investment.
Any investment advisor worth working with should be willing to explain, in plain English, all the various types of investment fees
that you will pay. If you don't work with an advisor, you'll still pay fees. You'll have to dig through the prospectus and financial
institution websites and documents to see what those fees are.
When inquiring about investment fees, if someone says, “My company pays me,” get more details. You have a right to know what you are paying, and how someone is being compensated for recommending an investment to you.
Here are the six types of investment fees to ask about.
1. Expense Ratio or Internal Expenses
It costs money to put together a mutual fund. To pay these costs, mutual funds charge operating expenses. The total cost of the
fund is expressed as an expense ratio.
The expense ratio is not deducted from your account, rather the investment return you receive is already net of the fees.
A fund with an expense ratio of .90%, means that for every $1,000 invested, approximately $9 per year will go toward
operating expenses.
A fund with an expense ratio of 1.60% means that for every $1,000 invested, approximately $16 per year will go toward
operating expenses.
2. Investment Management Fees or Investment Advisory Fees
Investment management fees are charged as a percentage of the total assets managed. These types of fees can often be at least partially paid with pretax or tax-deductible dollars.
Example: An investment advisor who charges 1% means that for every $100,000 invested, you will pay $1,000 per year in advisory fees. This fee is most commonly debited from your account each quarter; in this example, it would be $250 per quarter. Many advisors or brokerage firms charge fees much higher than 1% a year. In some cases they are also using high-fee mutual funds in which case you could be paying total fees of 2% or more. It is typical for smaller accounts to pay higher fees (as much as 1.75%) but if you have a larger portfolio size ($1,000,000 or more) and are paying advisory fees more than 1% then you better be getting additional services included in addition to investment management. Additional services might include comprehensive financial planning, tax planning, estate planning, budgeting assistance, etc.
3. Transaction Fee
Many brokerage accounts charge a transaction fee each time an order to buy or sell a mutual fund or stock is placed. These fees can range from $9.95 per trade to over $50 per trade. If you are investing small amounts of money, these fees add up quickly.
Example: A $50 transaction fee on a $5,000 investment is 1%. A $50 transaction on $50,000 is only .10%, which is minimal.
4. Front-End Load
In addition to the ongoing operating expenses and "A share" mutual fund charges a front-end load, or commission.
Example: If you were to buy a fund that has a front-end load of 5%, it works like this: You buy shares at $10.00 per share, but the very next day your shares are only worth $9.50, because .50 cents per share was charged as a front-end load.
5. Back-End Load or Surrender Charge
In addition to the ongoing operating expenses, "B share" mutual funds charge a back-end load, or surrender charge.
A back-end load is charged at the time you sell your fund. This fee usually decreases for each successive year you own the fund.
Example: The fund may charge you a 5% back-end load if you sell it in year one, a 4% fee if sold in year two, a 3% fee if sold in year three, and so on.
6. Annual Account Fee or Custodian Fee
Brokerage accounts and mutual fund accounts may charge an annual account fee, which can range from $25 - $90 per year. In the case of retirement accounts such as IRA’s, there is usually an annual custodian fee, which covers the IRS reporting that is required on these types of accounts. This fee typically ranges from $10 - $50 per year. Many firms will also charge an account closing fee if you terminate the account. Closing fees may range from $25 - $150 per account. Most of the time if you are working with a financial advisor that charges a percentage of assets these annual account fees are waived.
7. The costs and commissions are not tax deductable.
Michael D. Green, Principal
TGA Capital Management.Com
25 Braintree Hill Office Park
Braintree, MA 02184
A Registered Investment Advisory, RIA
Mgreen@tgacapitalmanagement.com
https://www.linkedin.com/in/tgagiacapitalmanagement
1.508.224.9646
This is not a solicitation nor recommendation to buy or sell a securities nor to imply any tax or legal advice, always seek a registered investment advisor to attain your risk/averse attitude and investment suitability before investing. All information is considered accurate and reliable, however, due to changing market, economic, taxation, institutional, and other pertinent potential cycles and variations, future results cannot be guaranteed by past performance and should be monitored on a continual periodic systematic basis to provide current advisory recommendations that meets the client short-term potential deviations and management disciplined style, while advisory provides solely long-term recommendations.
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