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Getting a Grip on Investment Fees

Posted by on October 1, 2018

When you are considering investing, how much you have to pay can be confusing. Investing fees are a multifaceted entity that can be easily misunderstood. The fees depend on how you invest, whom you invest with and what you invest in.  

Who Did You Sign Up With?

  • DIY Investment Site

These fees can be as low as $5 per trade, which means you pay $5 when you buy and $5 when you sell. Make sure you read the fine print on the website, as each site will charge differently. Also, make sure you are clear about what you are investing in, as each type of investment may have different fees.

  • Bank

Many people aren’t aware of this, but banks do charge fees when you invest with them. Even the poorly named “no-load investments” include fees. Here is how that works: you don’t pay any fees when you invest, but you do pay a monthly charge for holding your money inside the investment. This is called the Marginal Expense Ratio, or MER (find more on MERs below). Be on the lookout for MERs with most bank investments.

  • Financial Advisor

How financial advisors charge fees varies. Some charge a flat monthly fee, while others charge based on transactions. If you are working with a financial advisor, the best thing to do is talk to them about their fees. Most have at least some control over how much they charge, so be sure to ask.

What Did You Investments Did You Buy?

  • Stocks & Bonds

When purchasing an individual stock or bond, the most common fee structure is transactional. This means you pay a set fee or a percentage of your investment every time you buy or sell shares. Flat fees can range from $5 to $100 per trade and percentages can range from 0.05% to 5%. Sometimes advisors discount these fees based on how much you invest with them. 

  • Mutual Funds

These are the most misunderstood investment products on the market. The fee structures are also very commonly misunderstood. Mutual fund fees are split into two camps: upfront fees and MERs

  • Upfront or Purchase Fees

When you hear people referring to the “load” of a mutual fund, this is the fee they are referring to. There are three types of loads: Front End Load, Back End Load (also called Deferred Service Charge) and No Load.  

    • Front End Load

This is when you pay a percentage of your investment upfront. This fee is what pays an advisor’s commission. It usually ranges from 0 to 5% and is generally chosen by the advisor. For example, if you invest $100,000 and pay 2% front end load, $2,000 is paid to the advisor in commission and $97,000 is invested.  

    • Back End Load

This is a very contentious subject in the investment world simply because it’s not generally explained properly. There are no upfront costs but if you pull your money out of the investment, you get hit with a big fee. The amount of the fee decreases with every year that you hold your money in the investment. Using the above example, all of the $100,000 goes into the investment. But if you pull out in the first year, you pay 5.5% in fees, which is $5,500. Usually a deferred service charge schedule runs anywhere from three to seven years.

    • No Load

No load is common at big institutions, like banks. Here you don’t pay an up-front charge and there generally isn’t a fee to remove your investment early. However, you might want to read the fine print carefully: while there may not be deferred service charges, there may be early withdrawal penalties. It is a way to avoid the stigma of deferred service charges without losing out on fees.

  • MERs

Marginal Expense Ratios, or MERs, are monthly charges that are present on every type of mutual fund and ETF (exchange traded fund). They can range from 0.05% to 3% and are not listed on your statement, which is why most people don’t know they are charged. For example, when an investment with a 2% MER makes a return of 8%, 2% of that return is given to the investment company to pay for the investment manager and administration. The investors see a return of 6% on the statement. This occurs every month regardless of whether the investment makes money or not. If the fund has a loss of 2%, the investors show a loss of 4% on their statement.

  • A Note on “Fee for Service”

A coming trend in the financial advising profession is “fee for service” advice. These fees can be charged in a few different ways. Some advisors charge a monthly fee for unlimited access and trades. Another way is a one-time charge for a creating a financial plan that is carried out by the client. The most common type is simply an hourly charge for their time. Before you sign on the dotted line with a “fee for service” advisor, be sure to ask about hidden costs, the types of investments they recommend and what their qualifications are. Fewer regulatory bodies govern these types of advisors, and you may not be getting quality advice.  

 

The best way to be informed about investment fees is to ask a lot of questions. If you aren’t getting the answers that you want, you are always within your rights to take your money elsewhere.

 

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