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Understanding the fees you pay is key to understanding your investments. As with any business, there are costs associated with running a company that buys and sells securities or provides investment advice. These include transaction costs and operating expenses such as salaries, advertising, and marketing.
Companies cover these costs by imposing fees on investors. The fees may be levied on individual transactions or assessed periodically, for instance, as maintenance or account fees.
Fees and expenses vary from product to product and can take a huge bite out of your returns. An investment with high costs must perform better than a low-cost investment to generate the same returns for you. Even small differences in fees can translate into large differences in returns over time.
For example, if you invested $10,000 in a product with a 10% annual return before expenses and annual operating expenses of 1.5%, after 20 years you would have about $49,725. But if the investment had expenses of 0.5%, you would end up with $60,858 -- an 18% difference.
The best advice we can give you about understanding fees and investing wisely is to ask questions. It doesn’t matter if you are a beginner or have been investing for many years; it’s never too early or too late to start asking questions. Remember, it’s your money at stake.
Questions about fees include:
- What are the total fees to purchase, maintain, and sell this investment?
- Are there ways that I can reduce or avoid some of the fees I’ll pay, such as by purchasing the investment directly?
- How much does this investment have to increase in value before I break even?
- What are the ongoing fees to maintain my account?
- For mutual funds: How much will the fund charge me when I buy and/or sell shares?
- For the investment professional: How do you get paid? By commission? By the amount of assets you manage? By another method? Do I have any choice on how to pay you? Should I pay you by the transaction, or pay a flat fee regardless of how many transactions I have?