Clients of mutual funds and brokerage services often do not even know they are paying these hidden fees. For someone who is new to investing or isn’t as familiar with the ins and outs, it is easy to miss the hidden ways and the “small” fees various funds charge.
Here are a few things to remember when investing:
1. Don’t trade
Everyone loves the notion of “buying low and selling high.” However, investment firms make billions in trading fees, even with the low commission rates they are advertising. The rates aren’t the only thing that will get you. The tax implications are worse because your trade becomes taxable since you are making money in a non-registered account. Bottom line, don’t trade unless it’s absolutely necessary.
2. Invest in stocks and avoid closed-end funds
Some funds only own a few stocks but are still charging you a 1% annual fee. It would cost you much less if you bought the five individual stocks by themselves and pay the low, one-time commissions that come with purchasing stocks. This way, you won’t have to keep paying annual fees. Don’t fall for the constant advertisements of closed-end funds.
3. Don’t look at target prices
Target prices encourage you to trade and hold on to companies losing money for longer than you should. Instead of looking at the high target prices on stocks, you should look to diversify your investments and look at your long-term goals.
4. Don’t buy new issues
Brokers need to sell them and make a lot of money off of them, but you don’t need to buy them. IPOs are riskier and it’s rare to see one that constantly does well over time. Instead of worrying that you are missing out on the next big thing, turn and invest your money elsewhere.
5. Consider investing in index funds
More and more people are investing in index funds these days as they are a less expensive option. According to Morningstar, a fund data firm, more than $450 billion was put in index funds in 2018. With more demand, competition between fund companies to reduce investment fees and attract new customers has been taking place. Schwan announced that they would get rid of the fees charged for buying and selling stocks, options, and exchange-traded funds (ETFs) online. ETrade and TD Ameritrade also announced that they wouldn’t charge a commission on ETFs, options, and stock trades. Other brokerage firms such as Vanguard and Fidelity have also increased the number of trades that don’t have a commission. Fidelity even announced there would be no fees on certain index funds. With this being said, these brokerages can get you with other hidden fees that you might not be aware of.
6. Avoid mutual fund loads
These are like sales charges as they are paid by the investor to the broker of the salesperson who sold the fund. These are written as a percentage and can cost anywhere between 3 and 8.5%. There are several different types of loads.
One of these loads is called front-end loads. These are upfront fees and they are subtracted from your investment in the fund. Another load is called backend loads. These don’t charge an upfront fee but charge a fee when shares in the fund are sold. It is hard to know how much you will have to pay. The fee will be higher if you decide to sell in the first year, but it will decrease as you own the fund and will go away after about five to six years. There are most likely other funds charged by back-end load funds such as 12B-1 fees that are higher. Another load to avoid is called level loads. These funds don’t have upfront sales charges, but they have a 1% fee if the shares are sold in the first year. These also charge 12B-1 fees, making the fund more expensive in general.
Here are some hidden fees to avoid:
1. Sales Charges
If you are working with a broker in order to invest, an A-share mutual fund with the letter A at the end of its name might be suggested as a possible investment. These funds will charge a sales fee up-front of around 2-4% and their expense ratios are usually ten times higher than index funds with low costs. In order to avoid this, you might want to think about working with a “robo-advisory firm” that uses computer systems to manage your portfolio with a fee of only around 0.25%. You might even want to consider a target-date retirement fund with a low cost that becomes less risky as you approach retirement.
2. Management fees:
Before investing, you are going to want to know what the fund’s expense ratio is. This is an annual fee that is charged by ETFs and mutual funds for operating expenses and management. It is usually shown as a percentage of assets and the amount is taken out of your investment return every year. There is a wide range of expense ratios charged. Some funds charge 0.10 or less while others charge 1% or more. The solution is to go for the funds with the lower expense ratios. Oftentimes, firms such as Shwab, Vanguard, and Fidelity will have fees on the lower end. ETFs will also charge around 0.10% or less. This also goes for 401(k)s–look for funds with the lowest expense ratios. In the long run, this could save you hundreds of thousands of dollars.
3. Account Maintenance Fees
Traditional brokerage firms such as Edward Jones and Morgan Stanley charge fees in order to maintain your accounts. Morgan Stanley charges a yearly maintenance fee of $175 with a discount of $50 if you agree to have your statements delivered online. If you add more IRA accounts, the hidden fees can be anywhere between $50 to $100. Edward Jones charges a yearly account fee of $40 for your first IRA and then they charge $20 for each additional IRA you add on. In order to avoid these account maintenance fees, go with online brokerages like TD Ameritrade and Shwab who don’t charge account maintenance fees.
4. Financial Advice Fees
Financial advisors will often charge an annual fee of 1% of your assets in exchange for financial advice and portfolio management. And this doesn’t even include the individual fund expense ratios. However, you will only really have a financial advisor if you have an investment portfolio of $250,000 or more. In order to avoid these hidden fees, you should go with a certified financial planner who charged a flat fee or by the hour. Advisors can be found through platforms such as the National Association of Personal Financial Advisors. The XY Planning Network will offer advisors that charge a yearly retainer
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