What you see is what you get – or what you don’t see is what you get. As you start or continue to invest and save for college, retirement, weddings, vacations, and other goals it’s important to know the underlying fees and charges of the products and funds that you’re in. Very often these fees are buried in the minutia of a thick prospectus or in the fine print of your account statement.
Fees are necessary, but excessive fees aren’t. You should be getting what you pay for – but that can be hard if you don’t know what you’re paying.
Let’s take mutual funds for example. On one end you have fees and expenses going to the fund and the manager to try to do the best with your money – which is to earn a decent return (positive or negative) and hopefully beat their benchmark. This is typically a more expensive approach when the manager is trying beat their benchmark as there is more buying and selling of the stock and bonds in his or her fund.
On the other end of the spectrum, you have a passively managed fund or an index fund. These are typically less expensive as the manager doesn’t have to do a ton of work – after all, their fund is essentially mirroring the index – like the S&P 500 or the Barclays Capital Aggregate Bond Index.
So what determines a fair fee? For active and passively managed funds, anything less than one percent is going to be a good start. Think of it this way: if you have $100,000 invested in a fund charging one percent in expenses, that’s $1,000 annually going to the fund company. Half a percent is going to be $500 annually and a quarter percent is $250 and so on. This is on top of how the fund performed. So if the fund lost seven percent, you effectively lost eight percent. If you’ve gained nine percent, your net is eight percent.
Added to the fund expenses are the fees and charges your broker or adviser may charge. Front-end load or commissions are charged by commissioned advisers. These can range from around five percent to one percent depending on the fund for new dollars that come in. There are also 12b-1 fees (often referred to as trails) that are tacked on commissioned funds and these are usually around a quarter percent annually.
Fee-only advisers will charge from a quarter percent to up to two percent in addition to the fund expenses. They may also offer a range of services provided that include the management fees you’re paying such as tax returns, financial planning, and budgeting.
Read your statements, asks lots of questions and make sure you know exactly how much you’re paying.