Understanding Fees (Part 2): Mutual Fund Fees and Expenses

Dec 28, 2020 10:47:23 AM / by Michael Dailey

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Fees aren’t all bad (or avoidable).  Investing is a tricky business, and often you get what you pay for (like with anything else). Good financial advisors can be worth the money they cost.  The only way to know if you’re getting your money’s worth is to understand what you’re paying.  Account statements and websites are not always helpful when it comes to uncovering all you’re paying in fees. Sometimes it seems like they are purposely confusing (making fees difficult to understand or even see).  

 

How fees can impact your investment returns

Expense fees, management fees, transaction fees, commissions, surrender charges, and custodian fees are all fees that may be eroding your investment returns. It’s hard to imagine, but a ¾ of 1% change in your fees in year one of a $100K investment with a 5% return will cost you $12K over ten years.  You would never realize you lost the money because the losses are unrealized gains.  However, if we took $12K out of your check at the end of the ten years, you sure would notice! What could you do with another $12K?

 

Underlying Investment Fees

In addition to fees paid to your advisor, underlying investments charge fees as well. These typically come in the form of mutual fund fees. When you purchase part of a mutual fund, you become a shareholder. These fees tend to be between .20% and .75%, with a median of .50%. If you are paying more, you should expect greater performance. 

Mutual Funds typically pay operating expenses out of fund assets, rather than by separate fees charged directly to the investor. However, just because these expenses are paid from fund assets doesn’t mean investors aren’t still paying them (indirectly). Fees and expenses vary from fund to fund. A high-cost fund must necessarily perform better than a low-cost fund to generate the same returns. Small differences in fees can translate into large differences in returns over time. 

 

Examples of mutual fund fees and expenses include: 

 

Load Fees (sales fee)

Funds that use brokers to sell their shares typically compensate said brokers. Funds do this by imposing a fee on investors, known as a sales load (or sales charge), paid to the selling broker. If you already pay an advisory fee, you are most likely in a “no-load fund,” or better said, you don’t pay the load fee as you are already paying your advisor.

If you don’t pay an advisory fee, you will be in mutual funds with a load fee, and these can be paid on the “front-end” when you initially invest. Conversely, you may be paying a “deferred sales charge.” Here you pay a fee when you sell your shares in a mutual fund.

 

Redemption Fee

A redemption fee is a fee some funds charge shareholders when they (the shareholders) redeem their shares.

 

Exchange Fee

An exchange fee is a fee that some funds impose on shareholders if they exchange (transfer) to another fund within the same fund group.

 

Account Fee

An account fee is a fee that some funds separately impose on investors in connection with their account’s maintenance.

 

Purchase Fee

A purchase fee is a fee some funds charge shareholders when shares are purchased. A purchase fee differs from and is not considered a front-end sales load because a purchase fee is paid to the fund (not to a broker) and is typically imposed to defray some of the fund’s costs associated with the purchase.

 

Management Fee

Management fees are paid out of fund assets to the fund’s investment manager (or its affiliates) for managing the fund’s investment portfolio and for administrative fees.

 

12b-1 Fee

12b-1 fees are named after an SEC Rule that allows the fund to pay them. These fees are paid by the fund out of fund assets to cover distribution expenses and sometimes shareholder service expenses.  

 

Not all funds charge all fees. While the above may seem like a lot of fees, it’s essential to have an excellent financial professional and fund manager on your side. When the markets have large drops, you won’t panic because you have the right professionals. You will also have InvestorKeep to ensure you are paying the appropriate level of fees for your investments.

 

How InvestorKeep protects you against high fees

InvestorKeep tracks all fees and fee changes to alert you when they may be negatively impacting investment performance. Our fintech platform will alert you to changes in fees across all your accounts, giving you the information you need to take action, avoid high, unreasonable, or unwarranted fees, and keep your nest egg growing at a faster rate. 

In addition to the alerts InvestorKeep sends, the InvestorKeep Dashboard highlights how much you’re paying in overall fees and how they relate to market averages. 

 

Between InvestorKeep’s alerts and dashboard, you’ll be well informed of fees you are paying, whether they are appropriate, and what to do about them if they’re not. Finally, if fees do become overly burdensome, InvestorKeep alerts make it easy to share the situation with your financial professional, enabling them to showcase their value and ensure you are getting the value you deserve.



Michael Dailey

Written by Michael Dailey

Michael Dailey is the Founder and CEO of InvestorKeep, a company passionate about help you save money and maximize your investments. The average investor loses well over $100K to the implications of investment fit, fees, and quality. InvestorKeep gives you an easy way to monitor investments helping you keep and earn more.