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Investment Fees to Consider

IRA-150x150Financial security has different meanings for different people.  Some feel it is having enough money saved up that they never have to work again.  Others feel it is having a job where they know they are never in danger of losing that job and being forced into unemployment.  Still others feel it is having a good cushion in the event that they do lose their job, they don’t have to worry about finding something new immediately.  Regardless of the definition, almost everyone will have to accumulate wealth outside of a savings account.  They need to invest their money so that it can grow fast enough to live on after they retire.   Those investments, no matter how they are done, come with fees.  Make sure you understand the fees associated with investments before you choose to invest your money.

Investment Fees: Sales Charges

Most investments will come with a sales charge.  This is an upfront charge that is taken off the top of any investment that you make.  Legally the sales charge cannot be greater than 8.5%, and if a fund is charging this top rate, they have to make sure that the investor knows about the charge (and that it is justifiable to charge such a large expense).  Most actively managed funds charge a fee of around 5.75%.

This means that if you invest $1,000, that full $1,000 is not going to be put into your account.  Instead, the fund company will take $57.50 off the top.  This pays for their services, the costs associated with owning the fund, and it pays the commission that will go to your broker.  There are ways around these fees.

Investing in index funds, there are many of them out there, will avoid the initial sales charge and also the larger expense ratio (discussed below).  The tradeoff for these lower fees, however, is that your investments will do just worse than the stock market does.  A good actively managed mutual fund will actually recoup those fees and more (the trick is to find a good actively managed fund).

The other way to avoid mutual fund sales charges is to invest a large sum of money.  All mutual funds have breakpoints.  When these investment markers are met, the sales charges drop.  Usually you have to invest $1 million before you are able to eliminate charges all together.

Investment Fees: Expense Ratios

In order to hold on to your money, the mutual fund needs to charge an ongoing expense.  These are called expense ratios.  They are a part of every mutual fund out there, and there is no way to get around them.  However, there are things to look for so you don’t end up paying more than you need to.

Actively managed mutual funds have a higher expense than those that are not managed.  The difference is that in an actively managed fund, a team of investment advisors are constantly looking at the stocks and bonds in a fund, and moving them around as needed.  In a fund that is not managed, there is a set of stocks and bonds and you get a portion accordingly; they aren’t bought and sold based on how well they are doing.

There are two theories when it comes to expenses.  Some say that the higher expenses paid to an actively managed fund are justified because the managers get a better rate of return.  Others say that most managers aren’t good enough to pick the right stocks and bonds, and there is no sense in paying them.

If you want to avoid expense ratios, stick with an index funds.  Most of those have ongoing expenses of about .1% to .2%.  If you want an actively managed fund, try to avoid funds with expenses greater than 1% (some go as high as 2.5%). 

Don’t worry; you don’t have to write a check for the fees.  They are taken out automatically (as a lowered rate of return).

Investment Fees: Financial Advisor Fees

Just like any other profession, a financial advisor needs to be paid for his or her work.  There are two ways to do this depending on the type of account.

Some advisors act as brokers.  They will sell you the investments that are appropriate to your situation.  These advisors are paid a commission.  This commission pays them for the work they did at the time of the sale, and legally they sold you the investment that was appropriate at the time of the sale.  After that, it is up to you to come back and visit with them to make sure it is still appropriate.

Others choose to collect their fee as an advisor fee.  This is done two ways.  They can charge a fee to develop a plan for you (and then usually you don’t pay commissions if you use them to implement the plan).  Or they can charge a fee that is ongoing.  The industry average is a 1% advisor fee that is in addition to the expense ratio that you are already paying (upfront sales charges are waived in most advisory accounts).

When you pay an advisory fee, the idea there is that you get ongoing advice.  So if one fund isn’t doing well, or it doesn’t fit your goals any longer, then there is an ongoing duty to let you know.

When you have an advisory account, you can deduct these fees off of your yearly taxes.

Practical Taxes Can Help

We aren’t investment advisors, so we can’t help you buy and sell your funds.  But we can help with the tax deductions and making sure that you using the proper accounts to meet your tax goals.  When it comes tax time, we will prepare your taxes to make sure you get as big of a refund as possible (and then suggest that you use that refund to invest in your future).  Of course as payroll services experts in Billings, Montana, we can also help with your business needs.  Call us today at 406-894-2050. to learn more about how we can help you.