Keeping Financial Product Fees Low
Course Section
By the National Endowment for Financial Education®
All investors need to be aware of and understand fees because fees cut into your profits. This is true wherever you invest your money. Fees on investments can vary greatly. Here are ways to reduce the amount of fees you pay.
Mutual Fund Fees
Mutual funds can charge fees to buy and sell shares, as well as to manage and market funds.
Load v. No-Load Funds
One fee to consider is whether the fund charges a “load” or sales commission. Three common types of mutual fund loads are:
- Front-end load – These funds charge fees when you buy your shares. The fees are a percentage of your investment. They usually range from 2 to 6 percent. If you invest $10,000, for example, you may be charged $200 to $600.That means only $9,400 to $9,800 is actually invested.
- Back-end load – These funds charge fees when you sell your shares. The fees may be highest when you first invest and gradually decrease over time. So, the longer you stay in one of these funds, the lower the fees you will pay. Because they charge a fee when you sell shares, back-end loads (sometimes called redemption fees) can curb short term trading. This can protect the average shareholder from sharp changes in fund prices.
- No-load – No fees are charged when you buy or sell no-load shares. So, all things being equal, consider buying no-load funds over front or back-end load funds. You won’t pay any commission, so all your money will be invested.
Expense Ratio
Mutual funds also charge fees for management and advisory services, administrative costs, and marketing and advertising. These expenses can add up and are commonly referred to as the “expense ratio.” An expense ratio tells you the fees as a percent of your net assets. For example, a 0.50% expense ratio means that you will be charged fifty cents for every 100 dollars of net assets. Consider looking for mutual funds with the lowest expense ratios. Index funds typically have low expense ratios.
Comparing Fund Fees
Let’s say you decide to invest $10,000. You are considering two mutual funds. Assume both funds have a 5% annual return. Comparing the two funds, here are the fees you would pay:
|
Expense Ratio |
1 Year |
3 Years |
5 Years |
10 Years |
Mutual Fund A |
.64% |
$67.00 |
$211.00 |
$368.00 |
$822.00 |
Mutual Fund B |
1.10% |
$112.00 |
$350.00 |
$606.00 |
$1,340.00 |
This table shows fees you would pay if you sold all of your shares at the end of each time period. In this case, Mutual Fund B charges much more in fees, lowering the amount of money you have invested and working for you.
Fund fees can be researched through a fund’s prospectus. Each prospectus has a fee table that shows costs for different time periods.
Brokerage Fees
Brokerage fees also vary, and can take a big chunk out of your investment dollar. Brokerages charge three main types of fees:
- Transaction fees – These fees are charged whenever you make a trade. Transaction fees are also known as commissions. Commissions can vary widely. To minimize costs, use a brokerage with low transaction fees. It also may be cheaper to make trades online than by phone.
- Flat fees – Some brokerages charge flat fees instead of commissions. Flat fees are based on a percentage of your investments. If you’re a frequent trader with a substantial investment, flat fees can cost less because you are not being charged a percent of your investment with each trade. Because of this pricing structure, brokerages may require balances of at least $50,000 or more.
- Maintenance fees – These fees are charged if your account falls below a certain minimum. To keep costs low, always keep the required minimum balance.
Comparing Brokerages
As you can see, brokerages charge a combination of fee types. To compare brokerages, look at each fee type. Consider your investment style. The table below shows fees for two different brokerages:
|
Transaction Fee |
Minimum Balance |
Maintenance Fee |
Brokerage A |
$10.99 (online) |
$1,000 |
$60 per year |
Brokerage B |
$19.95 (online) |
$2,500 |
None |
In this example, if you keep a $2,500 balance and make few trades, you’ll save money with firm B. If you trade often, firm A may cost you less. So, consider your investment style carefully before choosing a brokerage firm.
Invest Wisely and Save
When you invest, ask the right questions. Research what fees you’ll be charged. Look for low-fee options. By investing wisely, you can make the most out of your money.
Take Action
Mutual Fund Expense Analyzer
Analyze different mutual fund expenses with this interactive tool.
AARP Resources:
Low Fees
Feed and expenses reduce your returns over time. Read more.
Additional Resources:
Don’t Let Brokerage Fees Undermine Your Returns
Learn ways to keep brokerage fees low.
[http://www.investopedia.com/articles/02/110102.asp]
10 Ways to Size Up a Broker
Get tips on finding a broker.
This column is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional or legal advice.
Note: The content areas in this material is believed to be current as of this printing, but, over time, legislative and regulatory changes, as well as new developments, may date this material.
The National Endowment for Financial Eduction® (NEFE®) is a non-profit 501 (c) (3) foundation dedicated to helping all Americans acquire the information and gain the skills neccesssary to take control of their personal finances.
© 2006 National Endowment for Financial Education. All rights reserved.
