"How much does it cost you to invest?” Most people default to considering the money you’ve saved and invested but not necessarily the cost of the investment itself.
This isn’t meant to be a ‘gotcha’ moment. No one works for free and reputable funds and advisors of course charge a fee, the trick is to not overlook the costs – and I mean ALL the costs – some of which may not be easily identified.
If most everything charges a fee, why bother? The short answer is that outsized fees not only reduce your returns but over years or even decades reduce your compounding potential in a protracted way and prolong your journey to your financial goals.
Let’s look at some of the hidden fees you might be paying in your investment portfolio and review a few ways to help reduce costs or at least identify things better.
Hidden fees in your investments can silently diminish your returns. While many people focus on the upfront costs, such as the fees that a Registered Investment Advisor may charge for managing your portfolio, the expenses within a brokerage or retirement account can sometimes go unnoticed.
These costs could be disclosed deep in the Investment Policy Statement, and not itemized clearly on your statements, making them difficult to evaluate.
The complexity of some investments, and even insurance products such as annuities, can obscure the fees and expenses you’re truly paying.
Although any reputable advisor firm should fully disclose these things, it’s prudent to do your own research and avoid paying more than you should. Here are some common fees and expenses to be aware of.
Based on the agreement you have with your advisor firm, you’ll likely incur transaction costs every time you agree to buy or sell securities. These costs can vary widely depending on your brokerage or trading platform.
While these fees might seem small on a per-transaction basis, they can add up significantly over time, especially if you’re an active trader.
When you have an actively managed account, you will tend to have a higher rate of transactions, and with that comes the potential for more tax liabilities through capital gains and capital gain distributions, thus lower your after-tax returns.
Some mutual funds or exchange-traded funds (ETFs) have expense ratios, or the annual cost of running the fund. These fees cover the fund’s operational costs, including management, administration, and marketing (12b-1 fees). The key here is to compare these ratios across similar funds.
Although counterintuitive, funds with higher expense ratios won’t necessarily deliver higher returns, so it’s essential to weigh these costs against potential benefits. And not all funds are the same – based on the share class (A, C, Advisory, etc.,) fees can vary dramatically.
See the example below of how fees can differ based on the class of fund. Keep in mind, the securities held inside each class of fund are the same, yet the cost to own the fund is very different based on what class you purchase.
| XYZ Funds - Moderate Income Fund | |||
| A Share | C Share | Advisor Class | |
| Initial Sales Charge | 3.75% | 0% | 0% |
|
Gross Expense Ratio |
0.62% | 1.12% | 0.47% |
|
12B-1 Fees |
0.15% | 0.65% | 0% |
Sales load fees are nothing more than commissions—either paid at the time of purchase (front-end loads) or when you sell your shares (back-end loads/exit loads).
These are typical with mutual funds, and do need to be disclosed prior to your purchase, however they can significantly impact your overall returns.
Not all funds have these fees, and it depends on the type of shares you purchase, but you’ll want to understand if you’re paying them or not and whether the potential return justifies the costs.
Proprietary fund fees are from funds that are managed directly by the brokerage company or banking institution who owns the funds.
For example, your advisor at BigBank Financial offers you a BigBank Financial Global Equity Fund. Since they manage the fund directly, the fees are paid to themselves, not a third party.
Sometimes they absorb this cost and pass along savings, but often they may be higher when compared to alternatives due to their smaller scale.
Again, just like you would want to benchmark performance, you should also benchmark fees of comparable funds. You may or may not be comfortable with the extra fees to get a certain product, but you should be given the opportunity to understand and make that call on your own.
Educate yourself. You’ll want to thoroughly understand the fee structures associated with your investments and the financial professionals you work with.
As I mentioned before, a reputable firm should fully disclose these things, but you should still do your homework. Don’t be afraid to ask for plain-language explanations of fees.
Opt for transparency. A fee-only, fiduciary advisor firm pledges to act in your best interests and be transparent about the costs you incur.
Fee-only firms like Plancorp are paid a flat-fee or a percentage of assets under management and not earn commissions. Fiduciary firms are held to the highest standards of care.
As an alternative, many financial advisors are not fiduciaries and are not held to the same standards of care. These firms charge commissions for their work and follow suitability standards that obligate them to offer client-appropriate investments, however the costs and commissions of those investments are not a consideration.
Get a Little Passive. Embracing a low-cost/no load index fund or ETF for part of your investment strategy could be an effective way to help reduce fees and costs. These types of investments generally have lower expense ratios compared to actively managed or front-loaded funds and are more likely to have fewer transaction costs due to a lower desire to trade based on their alignment with the index they follow.
Be Curious. Don’t be afraid to chat with your financial professional about the costs associated with your investments. Understanding how they are compensated—whether through commissions, fixed fees, or even a mix of both, can reveal potential conflicts of interest and help you make informed decisions.
Read The Fine Print! Make it a habit to scrutinize the details of financial products you may not be familiar with. Annuities, real estate investment trusts (REITs) and other investments can come with hefty price-tags, internal fees, and even extremely limited liquidation opportunities if you’re not careful.
Don’t allow hidden fees to quietly chip away at your returns—potentially costing you a significant amount over the long-term. Be an informed investor, opt for lower-cost options when they make sense, and don't go it alone.
If you're ready to work with a financial partner who will always lead with transparency, we're here to help. Take the first step today with our 2-minute financial analysis to see how you stack up in key areas of your financial plan and get started on a custom strategy tailored to your goals.