SALES CHARGE:
What is it:Let’s start with the sales charge (also known as a load). This is the additional fee you pay to a brokerage firm for the purchase of a mutual fund. Their cost for serving as the middle man.
What are the types?
There are 3 main types of sales charges I tell people to stay away from, A-shares, B-shares & C-shares.
A-shares are mutual funds that charge you an upfront fee. B-shares charge you fees on the back-end (when you’re ready to sell the fund), and C-shares can be classified as back-end but are more commonly known as level-load because you pay a fee every year.
Why you should care
These fees can eat into your returns.
A-share fees can be as high as 5.75%. For example, let’s say you have $1,000, and you invest in an A-share. You will be charged $57.50 upfront. That means you need to make sure you get a return of at least 5.75% to break even.
B-shares have a similar fee structure, with the main difference being that the fee decreases the longer you hold the fund. For example, you could be charged 5% if you buy a B-share and sell it within the 1st year, but if you keep it until year 6 or 7, the fee might be 0.
Lastly, C-shares are known as level-load because you can pay 1% per year for owning the shares.
Am I paying too much?
If at all possible, if you’re in the market for mutual funds, look for funds that have no sales charge (i.e., no-load funds). Many firms offer them (ex. Fidelity, Vanguard, Charles Schwab).
If you’re not sure if a particular fund you own has a sales charge, check out this handy tool fromFinra, just enter the ticker symbol of the fund and it will tell you what the fee is for that particular fund along with a lot of other useful information.?
ASSET UNDER MANAGEMENT FEE
What is it?
The asset under management fee the percentage charged by the broker for (you guessed it) managing your assets. The cost can be as low as .25% (if you go to a robo-advisor) or as high as over 2% (if you use traditional Financial Advisors).
What’s’ the fee based on?
The fee is based on two things, how much you have to manage (account balance), how much work is needed for your account (active or passive strategy). Some firms have a sliding scale fee structure. The more assets you have under management, the lower your fees.
Am I paying too much?
It depends on the type of account, where your account is held, how active your account is, and the relationship you have with your Financial Advisor.
If you’re paying over 2% or more and you hardly ever hear from your advisor, it may be time to reassess the relationship.
WRAP FEE
What is it?
Another type of fee you should be mindful of is called a wrap fee. A wrap fee is charged by investment firms as part of a bundled service. The is billed every quarter or annually and is a percentage of the assets under management.
The average fee is anywhere between 1% to 3% depending on your account size.
Am I paying too much?
The purpose of the wrap account is to keep your costs down. If you have an account of considerable size and you like to actively trade, your account may require a bit more work and lead to more fees, so a wrap account may be your best bet, and paying 2% may not be a bad deal.
If you use a buy & hold strategy and have a wrap account, it’s time to reassess and look into other types of accounts because having a wrap account doesn’t work best for your strategy.
THE FEE POTPOURRI
Other fees are often overlooked but should be taken into consideration when reviewing your accounts. I call these the fee potpourri.
TRANSACTION FEES
There are two types of transaction fees I want to focus on: trading and surrender.
Why do I have to pay to buy & sell?: Trading fees
Nothing kills an investor’s enthusiasm, like finding out not only is there a cost to buy an investment, but there will be a cost to sell as well. Commissions (fees you pay the firm to buy and sell a security) can be as little as $0 or as high as $1,500 per trade (yes, I’ve placed a trade, and that’s what it cost just to buy).
Trading fees can be a buzzkill, especially when you find out that they can be avoided.
If you’re still paying commissions, your options are to 1) set up an account with a broker that doesn’t charge commissions (ex. Robinhood) or use a wrap account (see above).
What the heck is a surrender fee?
A surrender fee is what you are charged for certain securities(ex. Annuity or mutual fund) if you sell it within a specific time frame.
It’s usually a percentage of the proceeds. Remember the B-shares I mentioned above with it’s declining fee structure? That’s a surrender fee.
Am I paying too much?
Yes. If you’re thinking about getting out of an investment early and there’s a surrender fee, avoid it at all cost because there’s no reason to pay this fee.
ANNUAL ACCOUNT/ACCOUNT MAINTENANCE FEE
An account maintenance fee is the fee brokerage firms (not all) charge you just to maintain your account (i.e., hold it there). The cost can be as little as $20 or as much as $95, and you pay it every year.
Am I paying too much?
Hate to say it, but yes. If you’re being charged an account maintenance fee, compare your account type to that being offered by other brokerage firms. Your goal should be to find a similar account at another firm with no maintenance fee.
Fees aren’t always avoidable but we can educate ourselves about them to minimize how much we pay. Knowing what the typical fees are and being mindful of them can save you a lot of money in the long run and make you a much better investor.
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