Investment fees are detrimental to the outcome of your investments and savings. Read on to learn more about common investment term definitions, how these fees affect investment returns and other useful information regarding your investments. At KNR Consulting Group, we know that your money is important to you, how you plan on using your money during retirement affects your plans and how you want to live. Let us help you plan for your future with retirement planning and financial investment and investment strategies.
Definitions of Common Brokerage Fees
Brokerage Account Fees: There are annual fees to help maintain the account, subscription fees to help with research and trading strategy, and fees in order to access trading platforms.
Trade Commissions: Your broker will charge you when you buy or sell certain investments, like stocks.
Mutual Fund Transaction Fees: Similar to trade commissions, this is when a broker charges you to buy or sell mutual funds.
Expense Ratio: Charged by all mutual funds, index funds, and exchange-traded funds, this is a percentage of your investment, charged annually.
Sales Loads: This is paid to the broker and is a sales charge or commission when the fund is sold.
Management or Advisory Fees: This is a percentage of the assets that are being managed, paid by an investor or financial advisor.
How Investment Fees Affect Returns
A simple 1.5 percent fee doesn’t sound like much at first, but over time, it adds up to a significant amount. For example, you put $500 dollars into a brokerage account for 30 years with seven percent annual return; if you are paying just .25 percent in fees, that’s over $26,000 that is lost to investment fees. If you’re paying 2.0 percent, that’s almost $180,000 that goes to pay investment fees. Just think about what you would do with that much money. If you want to be aware of what fees you are paying, a good place to start is knowing where to look. Each brokerage firm is different and each one is managed differently. Here are a few places to look for fees.
Annual Fees: These typically cost $50 to $75 a year. When choosing a firm, find one that doesn’t charge annual fees. Also, the type of account makes a difference. IRAs and brokerage accounts can both be charged different amounts.
Inactivity Fees: When you aren’t buying or selling, this could lead to inactivity fees. If you are planning on not trading frequently, find an investor who doesn’t charge a fee when activity isn’t taking place. This fee may take place monthly, quarterly, or yearly, and can add up to $50 to $200 a year or more.
Research and Data Subscriptions: Depending on the firm, this can be just $1 to $30 a month. Keep in mind that subscriptions are optional, so find a broker who offers premium research and data for free.
Trading Platform Fees: This is also an optional choice, but can cost you $50 to more than $200 a month.
Closing or Transferring the Account: Depending on the type of account within the brokerage, most firms charge a fee to close or transfer your account. This can cost you $50 to $75 per account.
Brokers will charge commission on stock and exchange-traded funds (ETFs). Usually, you pay somewhere between $5 to $10 per trade, depending on the firm. There are some firms that offer discounts if you plan on trading frequently. Find out what you want from a broker and how often you plan on trading and then choose a firm that fits your needs.
You learned before that an expense ratio is a percentage of the investment paid to the mutual fund. For example, an expense ratio of 0.10 percent, would mean that for every $1,000 you invest, you pay $1 per year. Expense ratios could be anywhere from .25 percent to one percent, which makes a big difference in the long run.
In a previous blog post, sales loads were briefly mentioned. This fee is completely avoidable by choosing a no-load fund. If you do choose a fund that has sales loads, there are front-end, back-end loads, and level loads. The difference being that there are upfront fees, or fees that are charged when shares are sold in the fund. The percentage of the fee can be anywhere from three percent to 8.5 percent of the investment.
Management or Advisory Fees
Whether you choose a human or an online service to manage your money, you are paying for that service. The way you are charged varies, but it can be on an hourly basis, a percentage of what is being managed, or a commission on the sale of certain investments. This is usually one percent for a financial advisor or .25 percent for an online service.
Unfortunately, even when an employer matches the amount you add, the money isn’t free. Fees go towards record-keeping, accounting, and administrative costs. If the employer does match the amount, contribute enough to reach that point and then continue saving with an IRA.
You can find information to help you decide which brokerage to choose on their website. Take some time before making a decision to search through the information they offer regarding fees and services. Investing money is never an easy adventure, but the more you know, the more prepared you are and you can expect to lose some money with fees that can’t be avoided. KNR Consulting Group wants to help you understand these fees and more! Whether you are looking for investment strategies, or if you are planning for retirement, we are on your side. Make the most of your money with our help, contact KNR Consulting Group today.