Investment Fees – the “quick” glossary
Preamble – In this blog piece I initially set out to define or explain most or all of the investment fees that are out there, but I quickly realized the scope of that would produce an article 14 pages long. So in order to keep it a bit simpler but still an informative post I only broke down the 6 types of fees that cover the majority of my clients.
With that explanation/disclaimer out of the way…on to the main event:
Do you know what you’re paying on your investments? If you’ve ever looked into it closely, chances are it is so confusing to figure out that you gave up trying. Believe me, I get it.
It's important to me that my clients understand what they are paying for and the value they get for those fees before they choose to hire me, but no matter how I try to describe them, fees inevitably get complicated. Fast. I wish it were as simple as “here’s the fee we charge for everything” and quote a flat amount or percentage. However, the way the investment industry is currently setup, that isn’t really possible.
- Management or Advisory fee: Typically a percentage of assets under management, paid by an investor to a financial advisor. You may have heard the term “wrap accounts” asnd that nickname generally applies to these.
- MAP
- MAPNavigator
- SPAPlus
- Some investment products which this fee typically applies to:
- Many financial advisors are fee-only, which typically means they charge a percentage of assets under management (AUM), a flat or hourly fee, or a retainer. Others charge a percentage of AUM and earn a commission from the sale of specific investments.
- On average, in a wrap account you’ll pay just over 1% of AUM for financial management by an advisor.1
- Note that management fees are in addition to the expenses of the investments themselves.
- Additional services above and beyond managing assets can be combined into this fee.
- Sponsor Fees – paid to a 3rd party to manage a list of investment options – could be included as part of the advisory fee (if applicable).
- Where to find: These should be the easiest out of all the fees to find, as they are required to be clearly marked on your investment statements, and your advisor should carefully review these with you before investing.
- Expense ratio: An annual fee charged by mutual funds, index funds and exchange-traded funds (ETFs), as a percentage of your investment in the fund.
- MAP (advisory share mutual funds)
- MAPNavigator (advisory share mutual funds)
- SPAPlus(advisory share mutual funds)
- A shares mutual funds
- C shares mutual funds
- 529 shares mutual funds
- Some investment products which this fee typically applies to:
- Expense ratios are charged by mutual funds, index funds and ETFs. They’re shown as a percentage of your investment and charged as an annual fee: A fund that has an expense ratio of 0.50%, for example, means that you pay $5 per year for every $1,000 invested.
- The expense ratio is designed to cover operating costs, including management and administrative costs. Funds that are actively managed — employing a professional to buy and sell its investments — typically carry higher expenses than index funds and ETFs, which are passively managed and track a stock market index, like the S&P 500.
- The expense ratio also includes the 12B-1 fee, an annual marketing and distribution fee, if applicable. 12B-1 fees are part of the total expense ratio, not in addition to it.
- Where to find: These are probably the hardest to find. They are on the fund’s page on your advisor/broker’s website, in the expenses or fee table in the fund’s prospectus, or on an independent research website like Morningstar.com. Also, if you have an advisor/broker, he or she should produce the expense ratios for you at your request.
- Sales load: A sales charge or commission on some mutual funds, paid to the broker/advisor who sold the fund.
- A shares mutual funds
- 529 shares mutual funds
- Some investment products which this fee typically applies to
- Sales loads are essentially a sales charge, paid by the investor to compensate the advisor/broker or salesperson who sold the fund. Sales loads are expressed as a percentage and typically cost between 0% and 8.5% depending on the amount of assets you invest with a particular mutual fund company. FINRA rules prevent mutual fund loads from exceeding 8.5%, though there are very few mutual funds that still charge more than a 6% sales load.
- Sales loads are becoming less prevalent in the industry and Management/Advisory fees are often taking their place. In many cases sales loads had been the cheapest way to invest in mutual funds for long term goals, and in some cases may still be.
- Loads are charged in several ways:
- Front-end loads: These are initial sales charges, or upfront fees. The fee will be subtracted from your investment in the fund, so if you invest $5,000 and the fund has a front-end load of 3%, your actual investment is $4,850.
- Back-end loads: Funds with a back-end load don’t charge an upfront fee; instead, they charge a fee when shares in the fund are sold. It’s hard for investors to get a handle on how much they will pay. In general, the fee charged is higher if you sell within the first year, and it declines for each year you hold on to the fund until it goes away completely after five to six years (this is why back-end loads are sometimes called “contingent deferred sales charges”). However, other fees charged by back-end load funds — like those 12B-1 fees — may be higher.
- Level loads: These funds have no upfront sales charge, but typically assess a 1% fee if shares are sold within the first year. Here, too, 12B-1 fees can be higher than funds with front-end loads, which means the fund may be more expensive to own in general, even without a sales charge. Level loads are no longer common.
- Where to find: On the fund’s page on your broker’s website, in the expenses or fee table in the fund’s prospectus, or on an independent research website like Morningstar.com. These can be hard to see on a statement as many times the purchase share/fund price is inflated to account for the sales load. For example a fund trading at $10.00 per share would cost you $10.02 per share when you purchase the fund if you were paying a 2% front-end sales load.
Ok, still with me? Good. It gets a bit simpler from here.
- Low balance Fee:
- A share mutual funds
- C share mutual funds
- 529 share mutual funds
- Some investment products which this fee typically applies to:
- Many mutual funds have minimum investment thresholds, typically $1,000 or less per fund, and if your investment is less than that it could be charged an annual low balance fee
- Annual reporting Fee:
- Any type of account
- Some investment products which this fee typically applies to:
- This is a fee charged per account NOT per investment. These are charged by your broker dealer to cover the cost of annual tax reporting. So even if you have 100 unique investments inside an account you still only pay one annual reporting fee.
- Financial Planning Fee:
- This is separate from investment fees, but often confused with investment fees. If you hire an advisor to perform a comprehensive financial plan, there will be a fee quoted. This fee is completely independent of any recommendations the advisor may make and is not tied to that advisor managing your investments.
- Many people develop a level of trust with an advisor that develops their financial plan and will also choose to hire that advisor for their investment and insurance needs. Others prefer to make sure the advisor is impartial while making recommendations and choose to manage investments or insurance needs on their own or hire another broker/advisor. This is completely up to the client.
Other common fees:
- Brokerage fee:
- A brokerage fee is a fee charged by the broker that holds your investment account. Brokerage fees include: You can generally avoid or reduce brokerage account fees by choosing the right broker.
- Mutual fund transaction fee:
- A brokerage fee, this time charged when you buy and/or sell some mutual funds.
- Trade commission:
- Also called a stock trading fee, this is a brokerage fee that is charged when you buy or sell individual securities.
- 401(k) fee:
- An administrative fee to maintain the plan, often passed on to the plan participants by the employer.
I hope if you read this far you learned at least something above and if you are a client and can’t remember what fees you are paying and would like to refresh your memory – please reach out to me and we’ll review it!
1 2017AdvisoryHQ Study – average Advisory fee for $1M account – 1.02%. average Advisory fee for $50k account – 1.18%
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.