If there’s anything that novice investors learn quickly about the markets, it’s that fees are a fact of life. They truly are everywhere, and can mean the difference between long-term success and failure for your portfolio.
After all, even a small fee such as 1% can add up over the years and take a series bite out of your returns.
But, because different financial planners and brokers charge fees differently and at different points along the way, they can be hard for investors to identify and compare directly. In other words, not all bills will look the same, nor will all fees.
But it helps to know where to look for fees and what most providers are doing. Here are some of the most common investment fees to be on the lookout for and how they might show up on your accounts and in your portfolio.
Brokerage account fees: Think about these as what they are — general, ongoing service fees that are charged by your broker for holding and maintaining your investment account. Not all brokers charge these fees, and some are higher than others, so it’s worth checking to see if yours does or not. Typically, this fee is for a percentage of your investment, such as 1 to 2% per year, but as mentioned even something like that can add up fast. However, the upside to these fees can come in terms of oversight. A brokerage that charges you a fee could mean that someone always has eyes on your investments, which could be a big help in growing your wealth.
401(k) fees: In addition to an administrative fee that’s levied to maintain a 401(k) retirement account, most 401(k)s also charge users investment fees that are charged as a percentage of the account and service fees that are charged for specific services (such as making changes to your holding percentages or underlying funds). These fees are often passed on by employers, although many employees are unaware of them.
Expense ratio: This type of fee is charged annually as a percentage of your investment in a fund such as a mutual fund, index fund, or exchange-traded fund (ETF). Take note that many commission-free ETFs carry higher expense ratios, meaning that while investors save a small amount (less than $7) on commission fees upon purchase, they pay higher annual fees every year thereafter.
Management or advisory fees: Typically charged as a percentage of assets under management, a management or advisory fee is not necessarily recurring as part of a contract or comprehensive review agreement. It’s a one-time charge that’s associated with a specific transaction.
Sales load: This is a commission-based fee that is sometimes charged upon selling mutual funds.
Trade commission: This fee is charged upon the buying and selling of stocks or other investments, such as options or exchange-traded funds. It’s the cut of your purchase that your broker takes as compensation for processing the order for you.
Mutual fund transaction fees: Another commission fee, this is charged when a broker buys and/or sell mutual funds. These fees can vary widely, so it pays to shop around with different mutual fund providers to find the best rates for your needs.
And then there are the fees charged by in-person advisors and planners.
Because financial planners are not one-size-fits all, it’s crucial to determine what services you need before pursuing one since some will charge more than others. If you are ready to build a portfolio and need comprehensive and ongoing advice, an annual brokerage fee at 1% of your investments might be a wise move. If you don’t plan to make frequent trades, commission fees might not be a big issue. If you are planning to keep your money in a mutual fund for a long time to come, then it might not matter if your broker charges a mutual fund transaction fee.
Once you establish what your needs are and search for a planner based on those, make sure that you understand how your planner earns their money and what their service will truly cost you, both now and in the future. This will help to inform your discussion about the number of fees, when they will be charged, and what you expect them to add up to. It will also help you compare apples to apples when considering more than one advisor or investment platform.
You probably won’t get away fee-free, but that’s okay if the money you spend helps you to achieve your financial goals.