Getting started investing is an excellent opportunity to build wealth and grow your income over time. Not only does your money work for you at all times, but it also adds assets to your overall net worth.
As you start your investment journey, you’ll notice that there are many different investment vehicles to park your money in. There are different types of bonds, ETFs, stocks, IRAs, etc. One of the most important things to know when finding a spot for your money is knowing about investment fees.
The banks are not developing these investing platforms simply out of charity. Every time you buy, sell, or even open an account, you are paying an investment fee.
What are investment fees? They are a fee that the broker charges for the services they offer. Whether it’s a fee for opening a brokerage account or a commission on a stock trade, it’s important to understand these fees and how they can make or break your investment portfolio.
You may come across many types of fees while investing or researching what brokerage is right for you.
If your portfolio is up 10% for the year, and your fees are 2%, then your gains for the year are only 8%. This might not seem like a huge deal since 8% is still a good return. What you should be doing is looking ahead to your investment plan. What are your goals?
If you were to put $100 a month into a brokerage account, at an 8% return per year, and your broker charged a 2% fee, after 30 years, your account would be up to $106,305. Great! However, you would have paid over $50,000 in fees. This is an extra $50,000 that could be earning you more of a return if you would’ve chosen a broker with better fees.
How can you find information about your broker’s fees? You can always go to your broker’s website and check the expenses or fees section. Shop around to find the best deal for you.
Continuing with the types of fees mentioned above, here is more information about each one and how to minimize your fees altogether.
Expense ratios are charged by funds. They are typically higher on actively managed funds like mutual funds and lower on ETFs and indexes.
The reason for this is because, with an actively managed fund, there are operating and administrative costs associated with managing your investments. With indexes and ETFs, they are passively managed and track a stock market index. This can be expensive, but it’s because stockbrokers often believe in their own expertise.
Actively managed funds may have fees of 1% or higher. But passively managed funds could be as low as 0.25% or even less in some cases.
Many brokerages charge a fee for trading stocks, options, futures, etc. These fees are currently getting lower and lower as more retail traders enter the market. You can find some very inexpensive brokers or even some that don’t require fees at all.
TD Ameritrade, Charles Schwab, E-Trade, Robinhood, and Interactive Brokers offer commission-free trading.
You can also find brokers that offer promotions, like free trading for your first month, or brokers that offer commission discounts for high-volume traders.
Mutual funds are not charged a commission fee when bought or sold, but they do sometimes have a transaction fee. These fees can range from $10-$80 in some cases. Lucky for you, there are ways to minimize these fees or even get around paying them.
TD Ameritrade has more than 4,000 funds that have no transaction fees. Sometimes mutual fund companies will offer no transaction fees but will roll them into the expense ratio. This is not always the case but is something to look out for.
In contrast to expense ratios, sales loads are a fee you can not get away from. This is a sales charge that an investor pays to compensate the broker or the salesperson that sold the fund. This charge is often expressed as a percentage. The charge may be between 3%-8.5%, FINRA does not allow sales loads to be over 8.5%.
There are a few different types of sales loads:
A 401(k) investment plan is usually reserved for employees. They can tend to be a bit expensive, as the administrative costs may be higher. They also have a limited choice of investment products, making it difficult to maintain a low expense ratio.
Many of the fees are either charged as a percentage of your account or as a flat fee. These fees are for a legitimate purpose, however. They help pay for the costs of record-keeping, legal and trustee structures, and accounting.
Many employers will pay the fees for their employees. This means that employees are only responsible for the investment expenses. As this can get expensive, a way to minimize expenses is to contribute as much as possible to get your employer to match that amount.
The average expense ratio for a 401(k) plan is 1.37%. This is a good benchmark on which to base your research into a retirement plan. You might also want to consider other aspects of plan providers.
Take, for instance, Mass Mutual. Mass Mutual 401(k) fees tend to be a bit higher. If you look at the Mass Mutual 401(k) fee disclosures, their average expense ratio is 1.81%. This is a little higher than average, but seeing how the company has been around for over 150 years, you can be reassured knowing this can be a safer place to leave your money.
It can seem daunting to read these numbers and terms when making such an important decision about where to invest your money. You have to worry about whether or not your investment yields a return, and then on top of that, you have to worry about how much it costs just to have it in the brokerage account!
Luckily, there are options. When it comes to finding a place to park your money, the first place you choose does not have to be permanent.
Let’s say you decide you want to invest a small sum of money into an index fund. The expense ratio is higher than average, but the payoff is they don’t have an account minimum, and since your account does not have a lot in it, the expenses don’t seem like much.
But let’s say your account grows more than expected, or you contribute a lot more, now those pricey expenses are eating away at your gains. What should you do?
You can use the Automated Customer Account Transfer Service or ACATS for short.
This system allows you to transfer assets from one brokerage account to another. This can let you transfer your investments to a lower expense account.
Another way to transfer assets to another account is to transfer your ESPP to a brokerage account. An ESPP is an employee stock purchase plan. This allows employees to purchase company stock at a discounted rate, usually through payroll deductions. Transferring stocks you’ve acquired through your ESPP to a low-cost brokerage account can allow you to trade or sell those stocks with lower costs.
It isn’t required of you to be an expert in all these terms to invest. But you would want to have a little knowledge when it comes to the technicals of investing your hard-earned money.
Remember, stockbrokers trust their expertise, and you should trust yours. Knowing these terms and phrases and different brokers can allow you to make a more informed decision when it comes to investing.