- Whether related to management, expertise or both, investment fees can impact your returns and, consequently, your financial plan.
- It’s important to find out what you get for the fees you’re paying. Understanding fees can also help you determine if active or passive investments are a better fit for your financial plan.
- Even seemingly small fees can make a huge difference to your investment returns over time.
“Fees have actually become a fairly important part of the all-in plan for investors,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “If you don’t account for them, your investment results could be different from your target, and that can cause problems for your investment or spending plan.”
Types of visible and invisible investment fees
Investment fees are generally tied to the costs related to handling your assets and the expertise required to help manage your portfolio.
They could include:
- Management-related fees such as commissions or sales loads (sales commissions charged at time of purchase or at the time of sale), transaction fees associated with buying and selling, and costs tied to technology and record-keeping systems.
- Expertise-related fees such as the planning, research and monitoring handled by an investment or financial professional.
The most obvious fees are those that appear as line items on a statement — such as an hourly charge for a financial professional, commissions on trades, loads on select mutual funds and redemption fees, according to Haworth.
“If you don’t account for fees, your investment results could be different from your target, and that can cause problems for your investment or spending plan.”
- Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management
What doesn’t usually appear on statements, however, are the fees charged by managers of mutual funds and exchange-traded funds (ETFs). Rather than providing guidance and investing advice like a financial professional, fund managers are responsible for implementing a fund’s investment strategy and managing trading activities. Fees associated with fund managers, which vary widely and are enmeshed in the day-to-day activities of the fund, are reflected in the daily net asset value of a share — not as a stand-alone figure.
“Financial professionals pay a lot of attention to costs embedded in funds, but clients may not ask about those fees unless they’ve been digging through the fund prospectus or semiannual report,” Haworth says.
Get smart about investment fees
Given the impact that expenses can have on your investment returns, Haworth suggests starting any fee discussion with two key questions:
- What do I get for this fee? Dig into the full scope of the offering. For example, if you’re creating a financial plan and there’s a planning fee, does that encompass creating the plan, adhering to it and the relevant investment research? Is there a team working for you? What services are included? What isn’t included that you might want? Consider the value of the expertise being provided. Do you have complex investments within your portfolio? Does your plan fulfill several goals and objectives?
- Is paying a higher fee worth it? Does a higher fee on an actively managed mutual fund — which uses a manager or team of managers in an attempt to outperform the market — make sense compared to a lower-cost index fund such as a passively managed fund — which simply follows the market index?
On the latter point, if the actively managed fund and the passively managed fund have a similar profile with many common holdings, it might make sense to opt for a lower-cost passively managed fund option. But if you’re considering an asset class where some selectivity can potentially enhance performance, then an actively managed investment might be more beneficial in the long run.
“We think a good case can be made for both active and passive investments, but you have to look at the data,” Haworth says.
When working with a financial professional, you may see fees in a variety of forms, such as in commissions; in the form of an hourly rate, or a flat fee calculated as a percentage of your assets under management. Many financial firms offer a sliding scale fee structure that drops as assets under management increase.
More tailored options
As fee levels fluctuate, financial professionals adjust their business models.
For example, instead of a one-size-fits-all approach to service, Haworth says firms are differentiating between low-cost support levels for investors who seek simple, off-the-shelf types of solutions and elevated fees for investors with more sophisticated situations who require a team approach and more frequent contact.
“That’s where the investor determines whether he or she finds value in the process,” he said.
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