As an investor, the goal is to obtain the best possible return. Unfortunately, there are a number of items that can erode your returns. Taxes, inflation, and fees all reduce your real returns from your portfolio.
While there is only so much you can do about paying taxes and offsetting the ravages of inflation, there might be a little more you can do about paying fees. There are some fees that no investor should ever pay. Check your accounts, and make the necessary changes to avoid these 3 investing fees:
1. Account Fees
These are fees that might be charged by a broker to keep your account open. With so many brokers available, there is no reason to be stuck with a monthly or annual account fee. There are also plenty of brokers that won’t charge you inactivity fees or minimum balance fees. Read the fine print to find out what fees might be charged as you open your account, and avoid brokerage accounts that have a long list of account fees. It’s one thing to charge fees and commissions for executing trades. It’s quite another to charge you just for keeping an account at the brokerage.
The only exception is if your employer’s 401(k) plan charges these types of fees. You still have recourse, though. You can roll over your 401(k) to an IRA (if it makes sense from a tax standpoint), or you can talk to your company’s HR department about changing plan providers.
2. Load Fees
Sometimes, when you buy or sell a mutual fund, you pay a load fee. This can be a real drag on your returns. Paying load fees doesn’t make much sense, either, since you can find plenty of funds and brokers that don’t charge these fees. Look for low-cost index funds to avoid load fees. Or, you can look at companies like Vanguard that offer a wide range of mutual funds that come without load fees. These days, with the options available (including ETFs that can serve as substitutes for mutual funds), there is no reason to pay a load fee.
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3. 12b-1 Fees
Look at your mutual fund account statement. Do you see 12b-1 fees listed? These are also known as marketing fees. Believe it or not, the Securities and Exchange Commission allows mutual fund companies to charge you fees to cover the costs of marketing their funds to other investors. These fees, especially when combined with account fees and load fees, can make a big difference in your overal returns over time. There are plenty of investments and funds that don’t charge 12b-1 fees, and you should focus on those.
As you de-clutter your investment portfolio, make sure that you focus on fees as part of the process; you’ll end up with better long-term results.
What about Management Fees?
Chances are that you are going to have to pay some sort of management fee whenever you invest. You might pay a flat transaction fee for purchasing an individual stock or an ETF, and most mutual funds and ETFs come with management fees, often expressed as expense ratios. Additionally, if you have someone manage your assets on your behalf, you will pay management fees.
However, this doesn’t mean that you should pay high fees. There are plenty of online discount brokers that charge flat rates of between $4 and $7 for stock and ETF transactions. Some mutual funds charge 2% or more per year in management fees. This is ridiculous. You can invest in an index fund or ETF for much less — often for less than 0.5%. Additionally, there are a number of asset managers that offer reasonable rates for managing your portfolio.
Before you settle on a broker or money manager, make sure that you are careful to comparison-shop on fees. Also, look at customer service and features. Sometimes, a really good money manager might be worth the extra price paid, if there he or she offers additional value. But, in most cases, you are better off paying as little as possible in fees.