Welcome back to another post in our investing in the stock market series here at Sprout Wealth. We all want to grow our wealth and investing is a key part to that. The issue we’re going to look at today is investment fees.
If you’re like me, then you hate paying fees and investment fees are among the worst offenders in my opinion. I regularly saw investors throw away their hard earned money out of ignorance because they were not paying attention to the fees associated with their investing. With that in mind, we want to help you make more informed decisions so you can have more of your money working for you as opposed to working for someone else.
Investment Fees Drag on Your Portfolio
Investment fees might seem like a small thing and you’d be right in many occasions. The problem is that many investors do not look at the long term impact of those fees. Paying 1% or more to invest in a mutual fund may seem like nothing today, but at the end of 10 years, or longer, that’s going to add up to thousands of dollars that could’ve been working in the market for you.
While you’re intending to invest in the stock market to make yourself wealthier you’re betraying your desires and ultimately making someone else rich. When I’m investing in the stock market, I’m doing so to grow my wealth, not someone else’s. This will require you to do some homework, but your future self will be thankful you did.
If you want professional management of your investments it can be a challenge to keep fees to a minimum. This is why I’m a fan of robo-advisors, like Wealthfront, that offer professional management for such a low price. Add that to a low minimum to open an account, it makes robo-advisors a worthy consideration for those who want management without the high cost.
One of the main fees associated with investing is commissions. This will especially be the case when you’re investing in individual stocks. Having worked in the online brokerage industry, I can tell you that most brokerages pay only $2 or $3 to place your trade. Now, I’ll let you do the math in terms of how much profit they’re making off of your trade. Are you mad yet? If you’re paying anything more than $7 per trade then your blood should start to boil.
What many investors don’t realize is that brokerages will often negotiate your commission charge. This will, of course, vary by the brokerage and amount of money and trading you do with them. However, don’t overlook this if you do any type of investing in individual stocks. Many of the bigger online brokerages make millions of dollars per day when it comes to commissions. With a little work you can keep more of that money in your pocket as opposed to being eaten up by investing fees. This is why I like to do our investing through both Scottrade as they are low in terms of cost and offer a flat commission structure.
When you’re looking to invest in a mutual fund or ETF then one of the first things you’re going to want to look at is the expense ratio. The expense ratio is essentially the cost of doing business and includes some of the following:
- Management fees
- Administrative fees
- Operating costs
- Many other things
The go-to source, in my opinion at least, to find out about expense ratios is Morningstar. The Morningstar site provides a wealth of information for mutual funds and ETFs and one of the best tools they provide is the Expense tab. On that tab, they’ll break down for you the cost to hold the fund, per $10,000 invested, for three, five or ten years. That is often the first tab I go to as it tells me in black and white what kind of investment fees I’ll be subject to.
Generally speaking, you’re going to see much lower fees in ETFs than you will in mutual funds, but not all the time. It’ll require work on your end to find a fund that has the lowest fee possible, while still fitting with your investment needs of course. That said, I’d be hard pressed to pay anything over 1% for a mutual fund. It’s just not worth it in the long run as it means more money in someone else’s pocket to manage an investment for you as opposed to in your portfolio.
Perhaps the worst offender, in terms of investment fees, is the 12b-1 fee. Technically speaking the 12b-1 fee is a part of the expense ratio. The 12b-1 fee is associated with marketing a specific mutual fund to you as an investor. What makes matters worse is that the 12b-1 fee can vary, so it can be hard to nail down a specific amount it’ll cost you.
One of the main reasons why I have an issue with the 12b-1 fee is that it incents sales reps to sell a specific fund to you. You get nothing special in return for it, other than less money in your pocket and does nothing to improve your returns. If you do like investing in mutual funds, do yourself a favor and find one without 12b-1 fees, which is actually shown on that same tab on the Morningstar site – there are plenty to choose from. Or, you could just choose to invest in ETFs as they do not charge 12b-1 fees. 🙂
Annual Account Fees
One of the other dreaded investment fees is the annual account or maintenance fee. Thankfully this has started to die at most discount brokerages, albeit very slowly. There are still a good number of brokers that charge an annual fee. It does you no good and is only a way for the brokerage to make more money off you. Ignoring whether or not you’re paying an account maintenance fee will only take money out of your pocket and hinder what you have working for you in the long run.
If you want to avoid paying an account maintenance fee, then it’ll require you to do some reading, but it’ll be well worth your time. They will vary by brokerage, but I’ve seen them as high as several hundred per year which is ludicrous. Some brokerages will be tricky with this investment fee and say you need to have a certain number of trades or have a certain amount invested with them. So, if you don’t trade much or are investing with $1,000 or less then you want to make sure you don’t fall prey to this investment fee.
Investment fees are a reality of investing in the stock market. I have no beef with that. I do take issue with investors who don’t do their homework and end up hurting themselves in the long run by not earning as much money. It’s up to you to find out what you’re investing is costing you in terms of investment fees.
How much do you pay in investment fees per year? Is it something you keep track of? Are you willing to pay someone to manage your investments in the hopes they can beat the market?
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