As you figure out where and how to invest, it’s easy to overlook one thing: investment fees.
That’s a problem, because investment and brokerage fees eat into your investment returns. Whether they’re baked into the funds you’ve selected as an expense ratio, added on as a brokerage commission when you buy or sell, or charged by an advisor who is helping you sort through it all, it’s important that you know what you’re paying.
Quick definitions of common investment and brokerage fees
- Brokerage account fees: These include annual fees to maintain a brokerage account, subscriptions for premium research to help with trading strategy, and fees to access trading platforms.
- Trade commissions: Charged by a broker when you buy or sell certain investments, such as stocks.
- Mutual fund transaction fees: Charged by a broker to buy and/or sell some mutual funds.
- Expense ratios: Annual fees charged by all mutual funds, index funds and exchange-traded funds, as a percentage of your investment in the fund.
- Sales loads: A sales charge or commission on some mutual funds, paid to the broker or salesperson who sold the fund.
- Management or advisory fees: Typically a percentage of assets under management, paid by an investor to a financial advisor or robo-advisor.
- 401(k) fees: Administrative fees to maintain the plan, often passed on to the plan participants by the employer.
How investment fees affect returns
Investment expenses directly reduce your portfolio’s return. If your portfolio was up 6% for the year but you paid 1.5% in fees and expenses, your return is actually only 4.5%. Over time, that difference really adds up.
Take this example, in which an investor puts $500 a month into a brokerage account each year for 30 years, depositing a total of $180,000 over that time:
|Average annual return||Total annual investment fees||Account value after 30 years||Amount lost to fees|
The last column in the chart shows how much would be lost to fees over the course of 30 years. An investor who paid 2% in fees each year would give up more than $178,000 over 30 years, almost as much money as the $180,000 deposited in the account during that time.
More about these investment expenses
If you want to be aware of your investing fees — and trust us when we say you do — you need to know where to look. Here are the most common expenses, what you can expect to pay for each and where to find the information:
BROKERAGE ACCOUNT FEES
These are fees charged by the online broker that houses your account. They might include:
|Brokerage account fees||Typical cost||How to avoid|
|Annual fees||$50 to $75 per year||Choose a broker that doesn’t charge annual fees. Pay careful attention to fees by account type, as brokers may charge different fees for IRAs and brokerage accounts.|
|Inactivity fees||May be assessed on a monthly, quarterly or yearly basis, totaling $50 to $200 a year or more||Investors who don’t plan to trade frequently should choose a broker that doesn’t charge for inactivity.
|Research and data subscriptions||$1 to $30 per month||Subscriptions are optional. Look for a broker that offers premium research and data for free. Fidelity and Merrill Edge both score high on this in NerdWallet’s ratings.
|Trading platform fees||$50 to more than $200 per month||Again, there are high-quality platforms available for free, like thinkorswim from TD Ameritrade.
|Paper statement fees||$1 to $2 per statement||Opt for emailed statements and notifications.|
|Account closing or transfer fees||$50 to $75||Most brokerages charge a fee to transfer or close your account. Here, too, the fees can vary by account type within the same brokerage. Some brokerages will offer to reimburse fees incurred when a new customer transfers an account to it.
In general, you can avoid or minimize brokerage account fees by choosing an online broker that is a good match for your trading and investing style.
Where to find details: On the broker’s website. Though it may not be in plain sight, there will be a page dedicated to account fees. If you have questions, call customer service and ask before opening an account.
Brokerages charge commissions on stock and exchange-traded fund trades, and they’re typically unavoidable. There are a few exceptions:
- Brokers that offer commission-free trading. These are usually bare-bones, like Robinhood and Loyal3.
- Limited-time promotions. Many brokers offer new customers a limited number of commission-free trades in the first few months after opening an account. This should not be the main reason for choosing a broker, though it could be a tie-breaker.
- Commission-free ETFs. Some brokers have a list of ETFs that trade with no commission.
Otherwise, you’ll typically pay between $5 and $10 per trade, depending on the online broker. Some brokers offer discounts for high-volume traders; others, like Interactive Brokers, offer per-share pricing in addition to — or instead of — per-trade pricing.
You should weigh commissions and your preferred investments carefully when selecting a broker, because it’s typically a value judgment. Most brokers that offer low trade commissions won’t offer commission-free ETFs; those that offer a long list of commission-free ETFs tend to have higher trade commissions, for example.
Where to find details: On the broker’s website — often the home page, especially if the commission is competitive.
MUTUAL FUND TRANSACTION FEES
With the exception of ETFs, mutual fund trades aren’t charged brokerage commissions. But they do sometimes carry transaction fees, which are charged by the brokerage when buying or selling the funds. Most brokers charge for both; some, like Charles Schwab, charge only to buy.
These fees vary by broker but can range from $10 to as much as $75. Fortunately, transaction fees are easily avoided by selecting a broker that offers a list of no-transaction-fee mutual funds. Typically, funds on this list will be from the broker itself, but other mutual fund companies often pay brokers to offer their funds to customers without a transaction cost. That cost may or may not be passed on to you, in the form of a higher expense ratio (more on this next).
Where to find details: On the broker’s website, typically on the same page where commissions are listed.
Expense ratios are inherent in all mutual funds, index funds and ETFs. They’re shown as a percentage of your investment and charged as an annual fee: A fund that has an expense ratio of 0.10%, for example, means that you pay $1 per year for every $1,000 invested.
The expense ratio is designed to cover operating costs, including management and administrative costs. Funds that are actively managed — employing a professional to buy and sell its investments — typically carry higher expenses than index funds and ETFs, which are passively managed and track a stock market index, like the S&P 500. The goal of a manager is to try to beat the market; in reality, they rarely do.
The expense ratio on an actively managed mutual fund might be 1% or more; on an index fund, it could be less than 0.25%. That’s a big difference, so you should pay careful attention to expense ratios when selecting your funds, and opt for low-cost index funds and ETFs when available. Be sure to compare apples to apples, though: Don’t compare the expense ratio of a U.S. stock index fund to an emerging markets stock index fund. The latter requires more research and will likely carry a higher fee.
The expense ratio also includes the 12B-1 fee, an annual marketing and distribution fee, if applicable. Remember the mention above, about how mutual fund companies can pay a broker to offer their funds with no transaction fee? If that cost is passed on to the investor, it will be as part of the 12B-1 fee. 12B-1 fees are part of the total expense ratio, not in addition to it, but it’s still important to know what you’re paying.
Where to find details: On the fund’s page on your broker’s website, in the expenses or fee table in the fund’s prospectus, or on an independent research website like Morningstar.com. Here’s an example of a prospectus fee table, from the Fidelity Freedom 2055 target-date fund:
Unlike expense ratios, mutual fund loads are totally avoidable. They’re essentially a sales charge, paid by the investor to compensate the broker or salesperson who sold the fund. Sales loads are expressed as a percentage and typically cost between 3% and 8.5% (FINRA rules prevent mutual fund loads from exceeding 8.5%).
Loads are charged in several ways:
- Front-end loads: These are initial sales charges, or upfront fees. The fee will be subtracted from your investment in the fund, so if you invest $5,000 and the fund has a front-end load of 3%, your actual investment is $4,850.
- Back-end loads: Here’s where things can get confusing. Funds with a back-end load don’t charge an upfront fee; instead, they charge a fee when shares in the fund are sold. It’s hard for investors to get a handle on how much they will pay. In general, the fee charged is higher if you sell within the first year, and it declines for each year you hold on to the fund until it goes away completely after five to six years (this is why back-end loads are sometimes called “contingent deferred sales charges”). However, other fees charged by back-end load funds — like those 12B-1 fees — may be higher.
- Level loads: These funds have no upfront sales charge, but typically assess a 1% fee if shares are sold within the first year. Here, too, 12B-1 fees can be higher than funds with front-end loads, which means the fund may be more expensive to own in general, even without a sales charge.
Again, the best policy here is to simply avoid these load charges. To do that, choose no-load funds. There are many, and the best part is they tend to outperform load funds over time, which means there’s no extra value in choosing a more expensive fund.
Where to find details: On the fund’s page on your broker’s website (often near the expense ratio), in the expenses or fees table in the fund’s prospectus, or on an independent research website like Morningstar.com.
MANAGEMENT OR ADVISORY FEES
If someone is managing your money — whether a human or robo-advisor — you’re likely paying for it.
Many financial advisors are fee-only, which typically means they charge a percentage of assets under management, a flat or hourly fee, or a retainer. (Most of the advisors on NerdWallet’s Ask an Advisor platform fall under this umbrella.) Others charge a percentage of assets under management and earn a commission from the sale of specific investments.
In most cases, you’ll pay around 1% for financial management by an advisor — that’s pretty much the industry standard, though some advisors will charge more or less.
Robo-advisors are companies that manage your investments via computer algorithm, and they often charge substantially less, because they’re taking the human element out of the equation. A typical fee is 0.25% of assets or less; some advisors, like Personal Capital and Vanguard Personal Advisor Services, combine computer monitoring with dedicated financial advisors and charge slightly more.
Note that management fees are in addition to the expenses of the investments themselves.
Where to find details: A financial advisor should carefully go over fees with you before you sign up for his or her services. Robo-advisors clearly state management fees on their websites. On an ongoing basis, you should be able to see how much you’re paying in management fees on your account statements.
You may have heard that 401(k)s are expensive. That’s generally for two reasons: They offer a small selection of investments, so it’s harder to shop around for low expense ratios. And administrative costs of running the plan tend to be high.
Many employers pass those on to the plan investors, everything from record-keeping and accounting to legal and trustee charges. These may be charged as a percentage of your account value or as a flat fee to each individual investor.
Some generous employers pay the fees on behalf of plan participants, which means you’re only responsible for the investment expenses. But if your plan is expensive and the investment selection is slim, you can minimize fees by contributing just enough to earn your employer’s matching dollars. Then continue saving for retirement in an IRA. If you’re able to max that out for the year, you can go back to the 401(k) to continue contributions.
Where to find it: Your 401(k)’s summary plan description should outline the investments offered by the plan, along with fees and expenses. Your employer should provide this when you join the plan, and your annual or quarterly statements will also outline plan fees. If you have questions, you should contact your HR department or the plan administrator.
This article was updated. It was originally published Sept. 16, 2013.
Image via iStock.