3 Investment Fees That Could Be Draining Your Wealth

by Miranda Marquit · 7 comments

Money down the drain

There are potential money leaks everywhere in our budgets. Some of the most egregious, though, are investment fees that could be reducing our wealth.

Investment fees erode your real returns. Instead of getting the most from your investment, these fees cut into what you’re earning. If your money is going toward fees, it also reduces the principal in your account. Over time, this can be a real issue, since it reduces the long-term effectiveness of the compound interest working on your behalf.

Here are 3 investment fees that could be draining your wealth:

1. Managed Mutual Fund Fees

One of the biggest issues comes in the form of managed mutual funds. Mutual fund fees can get very expensive over time, since the management fees can be 2% a year. Compared to the fees charged for index funds and ETFs, which can be as low as 0.04%, you’re paying serious money for the fund manager’s expertise.

That’s a big difference, and one that can add up to a huge difference over time. If you had an account with $100,000, 2% a year is $2,000. That’s a pretty hefty fee for a managed fund — especially since the chances that it’ll beat the market are relatively slim. You might be better off paying 0.5% a year, which is $500. Year after year, the managed mutual fund fees you pay can really start to add up to wealth that you’re missing out on.

2. Transaction Fees

There are two ways that transaction fees can drain your wealth. One is by paying more than you need to for trades. There are online discount brokers that charge $4 or $7 for trades, and those that charge $9.99 for trades. Some even charge as much as $12.50 for a trade.

Paying a smaller fee can save you money over time, particularly if you trade a lot. And, incidentally, this is the other way that transaction fees can drain your wealth. If you’re a frequent trader, or if you get worried with market ups and downs and trade as a result, the fees you pay can reduce your real returns. Before you trade too often, make sure you think about the impact all those transaction fees could have on your portfolio.

And don’t think that you don’t pay for the frequent trading that fund managers make either. Whenever they sell an investment at a gain, you’re incurring capital gains, which will eat into your effective return. What’s worse is that you can pay capital gains even if your overall investment in the mutual fund is down for that year, which can severely impact your overall wealth.

3. Retirement Plan Fees

This is related to managed fund fees. However, many people don’t really think about what’s in their retirement accounts — and the fees they’re charged. Often, it’s easier to just sign up for something without paying attention.

Make sure you look at the options provided in your retirement portfolio. The latest 401k disclosure rules make it easier to see what fees you’re paying, from load fees to plan management fees. Study them carefully.

While there’s no way to completely avoid investment fees, there are ways to minimize them. There’s no reason to pay high fees when there are low fee options available to you.

How have you avoided financial fees? 

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{ read the comments below or add one }

  • Aram Durphy says:

    ETFs are a great alternative to mutual funds. Another alternative is hiring a fee-only advisor to manage a portfolio of individual bonds and stocks for you (per your risk level). With a fee-only advisor, you won’t pay hidden fees, and you’ll eliminate many conflicts of interests you’ll have with a broker. Of course, this course only makes sense if you can find an advisor with an excellent long-term track record.

  • Cullie @ MyCreditClassroom.com says:

    Fees, fees, and more fees! This seems to be the trend to look out for in 2012 and beyond. Most people don’t comprehend how much they are actually going to be paying over the course of the year – instead they focus on the fee amount at that time in comparison to how much they have invested – rather than the total amount of fees over the year.

  • Sam Das, Wherewithal says:

    I couldn’t agree with this post more! Mutual fund fees are hardly ever justified since the majority of funds underperform their benchmarks. Add in transaction fees and individual investors face sub-optimal results. Dalbar, the market research firm, produces an eye-opening annual report called “Quantitative Analysis of Investor Behavior”. It shows that mutual fund investors underperformed the S&P 500 by 4.32% on an annualized basis over 20 years. Between mutual fund fees and excessive trading, individual investors pay the price.

  • Jeff Diercks says:

    I like your comment about managed mutual funds. ETFs are really the way to go. They are low cost, they are broad and diversified (in general). They also give you the flexibility to move with the trend. When the trend is up, be long. When the trend is down, be inverse or short the market. This is how professionals trade and they never lay asleep at night worrying about the markets or their portfolios.

  • MoneyNing says:

    Think carefully about the expense ratios of the funds that you buy. Not only are you paying a set percentage of your money out every year, you are also losing out on the compound interests of the money that you pay. All this adds up to huge amounts of dollars over years and decades of investing, so take some time to make sure the “expensive” funds are worth the cost!

  • Marie at FamilyMoneyValues says:

    There are also account fees at some brokerage firms. I know we are paying $125 per annum per account for the ‘privilege’ of using Merrill Lynch.

    • MoneyNing says:

      I would move the money out of any accounts that charges maintenance fees because you can simply pay less elsewhere for the same (if not better) service!

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