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Fees & Your Investments: What you Need to Know

Whether your investment portfolio consists of a 401k or multiple brokerage and retirement accounts, it’s important to note that no two investment vehicles are alike – and that fees associated with your investments can dramatically lower returns. Here, an overview of what to watch for:

Management Fees

Mutual funds often carry management fees associated with the fund’s operating expenses. These fees vary according to fund type. For example, bond funds tend to have lower management fees than equity funds. Some investment accounts also carry annual administration fees. Higher management fees do not denote a better-performing fund, so don’t assume you’re getting what you pay for.

12B-1 Fees

These mutual fund fees are charged annually and are considered to be an operational expense associated with a fund’s “marketing and distribution”. This could be anything from paying brokers to sell the funds or providing sales incentives. These fees are included in a fund’s expense ratio and can be found in a fund’s prospectus.

Front-End Load Fees

Front-end load fees are paid out to a broker in the form of commission when he or she sells a mutual fund. When an investor purchases a front-end load mutual fund, a percentage of their investment goes to the broker. For example, if an investor pays $15,000 into a 2% front-end load mutual fund, $300 goes to the broker and $14,700 of the investor’s money goes into the fund. Front-end load mutual funds are usually “Class A” shares.

Back-End Load Fees

Also known as a deferred sales charge or DSC, back-end load mutual funds charge a penalty fee if you sell your shares within five to ten years. Fees are highest within the first year of purchase, and decrease each year until the end of the agreed-upon holding period. Back-end load mutual funds are usually those denoted as “Class B” shares.

Want an Advisor? Commission versus Fee-Only

If you’re looking for a little extra help with your investments, keep in mind that not all financial advisors are the same.

Some advisors are commission based. These types of advisors, known as investment brokers, make money through the commissions associated with investment transactions. An investment broker buys and sells securities within a clients’ account. The frequency and volume of trades can increase a broker’s commission – and end up costing the client a lot of money.

Fee-only registered investment advisors (RIAs) charge a flat hourly or annual rate for their services. RIAs have a fiduciary responsibility to act in their clients’ best interests. Unlike investment brokers, they provide advice and make transactions without taking commission-based compensation. They tend to use low-fee investments, including low-cost no-load mutual funds, individual stocks and bonds and investments that do not have 12B-1 fees.

Keep in mind that there is a major difference between fee-based and fee-only advisors. Fee-based advisors charge a fee to clients but also take commissions from mutual fund companies, insurance companies and brokerage firms. When shopping around for an advisor, be sure to ask how they are compensated.

Discover how much your mutual fund fees are costing you. Sign up for Personal Capital and link your investment accounts to the Dashboard. Then run our Investment Checkup and click “Costs” for an overview of annual fees. 

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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