- Chris Cyndecki CFA, CFP®
Investment Fees (Part 1)
Fees are one of the few things investors have direct control over in the hectic investment universe. Fees can have a significant impact on long-term portfolio performance. In the first part of this blog series, we'll take a look at the explicit costs of investing. Mutual Fund/ Exchange Traded Fund Fees Front-end load : upfront commission paid to a financial intermediary (broker or financial advisor) who sells a specific fund. This fee is deducted from your initial investment capital. For example, if you invest $10,000 in a fund with a 5% front-end load, $9,500 is invested in the fund, while $500 is paid to the advisor or broker as a commission. Front-end loads are often labeled as "Class A" shares. The letter "A" follows the fund name on an account statement. Back-end load: commission paid to broker or financial advisor when fund shares are sold. The fee is dependent on how long the investor holds on to the shares. Shorter holding periods require a higher percentage fee. Back-end loads are often labeled as "Class B" shares. 12b-1 fee (Level Load): annual marketing or distribution fee. This ongoing annual fee is often paid as a commission to a financial advisor or broker for selling a fund's shares. These fees are included in a fund's expense ratio. Expense ratio: total operating costs of a mutual fund. These include: compensation for fund managers, recordkeeping, custodial services, taxes, 12b-1 fees, and legal expenses. Redemption fee: the fund will asses this fee if shares are sold within a specific period of time - usually 30-90 days from the purchase date Broker Fees Transaction fee: assessed by a broker for each purchase or sale of fund shares. Transaction fees are usually lower for Exchange Traded Funds (ETFs) than mutual funds. Many brokerage firms have transaction free mutual funds and ETFs which do not charge a transaction fee (restrictions apply). Account transfer fee: assessed by custodian for transferring funds or shares to another custodian Portfolio Implementation Fees Investment management fee: covers evaluation of client's investment goals and risk tolerance, implementation of recommended asset allocation, and portfolio rebalancing. This fee is usually a fixed percentage of portfolio assets. How much am I paying in fees? Many of the above mutual fund/ETF fees are listed in the fund's prospectus document. Also the mutual fund research company Morningstar publishes a significant amount of information related t
Brokerage firms will usually notify clients of transaction costs prior to accepting a trade order. Your financial advisor will quote you an investment management fee prior to creating a portfolio recommendation. Mitigating investment fees is an essential piece of successful portfolio management. Speak with your financial planner about optimizing fee efficiency in your portfolio.