Costs and Fees

The greatest challenge an investor faces in meeting his or her financial goals are the costs and fees associated with managing their portfolio.  And these are the items they have the greatest control over.

Fees come in many forms and are both easy and difficult to identify. 

The easiest fees to see are those associated with brokerage account. An investor places an order to buy or sell a stock or an exchange traded fund (ETF) and they see the fee quite readily as the commission charged to execute the trade.  However, investors who trade frequently in their portfolios will see their returns impacted by the brokerage commissions, even at discount brokers, from their trading.

Some mutual funds charge what is called a load. These fees are usually, though not always, charged at the time of purchase. They can run more than 5%.  For example an investor may wish to purchase $1000 of mutual fund X.  And fund X charges a front end load fee at the time of purchase of 5%.  The investor’s investment is reduced by this amount. So instead of purchasing $1000 of mutual fund X the investor is only receiving $950 of the fund.  This load is used to compensate the broker.  These fees can add up if the investor is investing in this type of fund on a recurring basis.

In addition to the load fees or if the fund is a no-load and does not charge a sale fee, there are management fees.  These fees that can be more difficult to ascertain and are the fees charged to manage and market the mutual fund.  Yes, the mutual fund industry charges the fund shareholders a fee to market it to the shareholders. They are also used to compensate advisors to recommend them when the fund is sold as a no-load fund.  These fees are usually identified as management and/or 12b-1 fees in the funds documents.  The mutual fund industry average for these is about 1.3 percent.  The challenge investors face with management fees are they result in a drag on the fund’s returns.

Another fee that is generally upfront is the fee an advisor charges for assets under management. These fees are laid out in the advisor’s contract and are usually charged as a percentage of the value of the portfolio. For example, an investor’s has a portfolio valued at $100,000 and their advisor charges a fee of 1% of the portfolio’s value per year.  This equates to $1000.  These fees are usually billed quarterly or monthly basis.

In conclusion, investors can take steps to minimize the impact fees on their portfolio.  If an investor is making buy and sell decisions on their own, ensure when they place an order that their reasoning is sound and they intend to either stay the course of their decision. Not many are successful day-traders.  If, using mutual funds, either with an advisor or on their own, they should do their homework and ensure the fund achieve what they their looking to achieve at a reasonable cost. And perhaps look into low cost index funds or ETFs as a means to reduce costs and meet their goals. If an investor is using an advisor, ensure the advisor is clear on their fees and what services the advisor provides.

 By controlling portfolio costs and getting the best value for the fees they are paying an investor can potentially realize a more secure financial future.

The content contained herein represents the author's opinion and should not be regarded as investment advice, which is provided only to Agnew Capital Management LLC clients upon completion of a written plan.

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Comment   |  4 years, 1 month ago from Sierra Vista, AZ