Here’s a pop quiz: Name a service you buy, on either a subscription or transaction basis (or both), but have no idea how much you actually pay.
No, I’m not thinking of your mobile phone or cable TV bill, although those are examples of services with dense layers of fees. Still, consumers pick through these charges in an effort to shave a few bucks off the household expenses.
Unfortunately, many Americans don’t focus that much attention on investment fees.
Here are some ways to know whether you are paying too much:
Your mutual fund carries a sales charge
Many actively managed mutual funds — those in which a manager is picking stocks — have sales charges. The amount of the charge represents the difference between the price per share, paid by you, the investor, and the net asset value per share of the fund itself. That is somewhat murky and complicated for many people to understand.
The maximum allowed sales charge is 8 percent. That is included in what you pay for the fund, and you may not see it on the monthly statement from your broker.
With funds that carry a charge, you’ll find three share classes. For Class A shares, the charge is paid at the time of purchase. Class B shares charge the fee when the shares are sold. Class C shareholders pay the charge on a regular basis, as long as they own the fund.
Read the fine print, or simply ask your adviser whether your funds have sales charges. A portfolio that uses passive strategies will generally save you a good chunk of change.
Your fund charges a 12b-1 fee
The 12b-1 fee is an added charge. It’s a fee the fund company collects from you, and then turns around and spends on marketing to garner new business.
These 12b-1 fees generally range from 0.25 percent to 1 percent, but unlike the one-time sales charge, 12b-1 fees are collected on an ongoing basis. Over the long haul, they can take a bigger bite out of your return than even sales charges.
Higher-than-average fund management fees
With the rise of passive management styles, such as mutual funds and exchange-traded funds that track an index, it’s easy to find inexpensive investment vehicles.
But you may be paying too much if you hold actively managed funds, in which the fund manager tries to outperform an index, such as the S&P 500.
According to research by CXO Advisory Group, stock-picking “gurus” who publish newsletters and appear on TV have less than a 50 percent chance of making a correct guess. Many of these self-proclaimed gurus are fund managers. Don’t believe that the person picking stocks for the fund you own has a better-than-average chance of making the right bet!
The science of investing has shown it’s a fool’s errand to consistently pick the right stock. Nonetheless, actively managed funds sometimes carry high expenses for running the fund itself: Paying managers to pick stocks or covering fees to travel and vet the firms behind stock ideas.
In 2014, according to Morningstar, the asset-weighted expense ratio for passive funds was just 0.20 percent, compared with 0.79 percent for active funds.
Your adviser charges higher-than-average fees
Aside from the expenses of a mutual fund or ETF, your adviser also needs to be paid.
According to AdvisoryHQ, the average fee, nationwide, for a $250,000 account is 1.07 percent.
But what exactly are you paying for? If you are paying an asset management fee, does your adviser also provide these services?
- Insurance planning;
- Social Security strategy;
- Post-retirement tax strategy;
- Retirement income withdrawal rates;
- Real estate-sale analysis;
- Account consolidations;
- Capital gains tax analysis and strategy.
Are you paying as much as 2.5 percent of your account value for no added services? If so, it’s time to rethink your strategy.
Too many nickel-and-dime brokerage fees
Below are some real fees charged by a national brokerage firm. This is a firm with many offices around the country, staffed by professionals with fancy credentials:
- $39 trading fee for a stock or ETF;
- $30 commission for a trade totaling less than $2,500, plus 1.7 percent of the principal;
- $3 for a trade confirmation;
- 35 yearly maintenance fee for your Roth or IRA;
- $10 maintenance fee if your account holds only mutual funds;
- $95 to close your account;
- $100 to transfer any portion of your account;
- $15 to deposit funds via check.
Don’t fall for these shenanigans. Don’t pay too much for actively managed mutual funds or for so-called “planners” who don’t do any actual planning for you and your family.