The investment landscape is littered with a minefield of fees and expenses that can be difficult to navigate for first time investors. The costs depend on the types of investments made and how they are purchased. The fees that apply to a specific fund can be found on the fund’s prospectus or annual report. Here is a list of fees that investors can expect to come across when looking to make an investment.
The Brokerage Fees
Account Fee: Brokerage accounts may charge an annual account fee ranging from $25-$100. There are conditions in which the account fee can be waived; generally, if a minimum amount is invested with the brokerage, the fee will be waived.
Transaction fees: Brokerage accounts charge a transaction fee each time a fund or stock is bought or sold. These fees start at $4.95/trade and can cost more than $50/trade. The value of the transaction fee depends on two things: the amount of assets held with the brokerage and number of trades within a specific duration. For example, the higher the amount of assets held would result in lower cost per trade. Also, clients who make a significant number of trades on a quarter basis are charged a lower transaction fee per trade.
The Management Fees
Management Expense Ratio (MER): Management companies, who assemble and manage the fund, charge a fee called Management Expense Ratio (MER) to cover commissions as well as overhead costs of marketing, auditing, and other administrative duties. It is expressed as a percentage of the total assets invested in a twelve month period. The MER is charged regardless of the fund’s performance and deducted before calculating the investor’s return.
Trading Expense Ratio (TER): Management companies incur trading costs, similar to any individual investor, when they buy and sell individual stocks in a mutual fund. These costs are passed along in the form of a Trading Expense Ratio (TER). The TER is expressed as a percentage of the total assets invested in a twelve month period and is charged regardless of the fund’s performance.
Sales Charges
Brokerages often also a charge sales fee on the investment. There are three types of sales charges that are used to compensate sales people for selling the fund. Investors have the ability to choose the preferred sales charge to apply to their investment. There are also some funds that do not have any sales charges.
Front End Load or Initial Sales Charge (ISC): A front end load is charged when the investment is purchased. The fee is a percentage, up to 5%, of the amount invested; the percentage value is determined by the brokerage and can be negotiated by the investor. The front end load is deducted from the amount invested.
Back End Load or Deferred Sales Charge (DSC): The back end load is charged if an investment is sold before a specified holding period, usually 7 years. The fee is a percentage of the amount invested and it decreases each year until it reaches zero at the end of the specified holding period.
Low Load (LL): The low load fee is similar to the back end load in that the investor is charged if they sell their shares with a specified holding period, usually 3 years. The fee is a percentage of the amount invested and it decreases each year until it reaches zero at the end of the specified holding period.
No Load: Some mutual funds are considered to have no load; there are no fees to purchase the fund. Some brokerages will also allow you to purchase specific products without any fees.
The Last Word
It is important to understand the different types of fees and expenses associated with investing since they can significantly impact returns. Recognizing the fees will eliminate unexpected costs and lead to the ability to make better investment decisions.
Have you ever been hit by an unexpected investment expense?
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