Long-term investing is important for just about everyone, and it can become a complicated process for most people who are looking for the best way to structure their retirement and supplemental income. There are many different ways to invest, and many different fees associated with those investments. Each investor has different goals, and certain advisory fees can work with or against those goals. Here is a breakdown of some popular advisory fees and how they can affect your decisions.
Expense Ratio or Internal Expenses
Also known as “management expense ratios”, they are the percentage of fund assets used to cover expenses associated with the operation of a mutual fund. They include operating expenses and management fees, and the fund’s asset size works inversely with the expense ratio. For example, a fund with an expense ratio of .7% means that for every $1,000 invested, $7 per year will go toward operating expenses. Some other factors affecting these fees include the asset size of the entire group, whether the fund is an index or institutional fund, and the investment category. Your investment return received is typically net of this fee.
Management or Advisory Fees
These fees are based on a percentage of total assets managed within a fund. Under certain circumstances they can be paid with pretax dollars, and these fees are charged for making investing decisions on behalf of a client. Typically, these fees are a very small percentage of the total assets of large dollars being paid. Therefore, it is mainly open to institutional investors and high-net-worth individuals.
One of the most common types of fees is transaction fees; they are charged each time you buy or sell a stock or mutual fund. Most institutions will charge a flat rate per transaction, and they range anywhere from $7 to up to $50 per transaction. Now, this can work for or against you. For example, a $10 transaction fee on a $1,000 investment is 1%, whereas a $10 transaction fee on a $10,000 investment is only .1%.
These fees are applied at the time of the original purchase, and they get deducted from the investment. Front-end loads are paid to advisors as a commission in addition to the operating expenses. This is sometimes referenced as the cost to obtain a financial planner’s knowledge and expertise to work for your net worth. Retirement options such as 401(k) will usually waive the sales charge on a front-end load fund.
For any further information, please contact your regular WithumSmith+Brown partner.