Investors tend to focus on risk and return, but they sometimes forget that investing is not free.
Investment products and services come with costs and fees. And while they seem innocuous at first, they can take a big bite out of your nest egg over the long term.
The Securities and Exchange Commission, in a recent investment advisory, put together a compelling chart to make the point.
The regulatory agency looked at hypothetical portfolios over a 20-year time frame with an initial $100,000 investment and assumed each earned a 4% annual return, but paid ongoing fees that varied from 0.25%, to 0.50% and 1%. Take a look that the divergent paths of these portfolios.
Obviously, fees are important and can have a meaningful impact on investors’ bottom line.
Here are five quick tips for investors on fees and how to minimize them:
1. Fees generally come in different flavors
Investors can get hit with transaction fees each time they buy or sell a security. The second type of fees are ongoing such as an annual account maintenance fee.
Both are pretty straightforward, but other fees are far tougher to understand.
2. Watch for hidden fees
Then there are other “soft dollars” transaction costs based on commission revenue.
Kyle Caldwell at the Telegraph recently come up with a list of five hidden charges, including the practice of some fund management firms to charge investors extra towards the cost of marketing and distributing the fund. Other funds charge performance fees that kick in during particularly strong performance years.
3. Take responsibility
Meanwhile, Ron Carson with CNBC bemoans the fact that most investors are clueless about the hidden fees they pay and the financial services industry doesn’t help matters by being so opaque. Says Carson:
“What really disturbs me is the fact that the financial services industry is underwhelming and disappointing investors when it comes to the topic of hidden fees. Investors aren’t getting their questions answered or are only receiving partial, incomplete responses. In fact, the advisory firm Reputation Institute awarded the financial services industry a ‘scarlet letter’ in 2013, ranking it last among 17 industries for reputation.”
4. Factor in all fees
Even without hidden fees, many investors aren’t even sure of how much they have agreed to pay upfront. A typical investor can easily pay 1.5% to 3% of assets in fees.
5. What to do
Investors need to be vigilant and spend as much time as studying the fee structure of the investment they buy as they do calculating risk and potential return.
It requires some upfront time and brainpower, but it pays to dive into the details and be firm about getting straight answers from your broker or financial adviser.
A lot of money is potentially at stake.
DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. All investments involve risk, the amount of which may vary significantly. Past performance is no guarantee of future results.