Lori Schock is Director, SEC Office of Investor Education and Advocacy
What’s the big fuss about investment fees? Do they really matter that much? You bet! When investing, you will come across different kinds of fees, from trading commissions to annual management fees. Different types of fees affect your investment returns differently, and you should take that into consideration when making choices on your financial future.
Certain fees may seem small at first, but over time they can cost you big time. The most important factor to consider when you’re investing is the kind of service you want from an investment professional and the costs associated with that service. Some investment professionals and their services have charges per transaction. Transaction fees include commissions — a financial professional buys or sells a stock for you; markups — a broker-dealer sells you securities that it has in its inventory; sales loads — mutual fund charges similar to a commission; and surrender charges — early withdrawal from a variable annuity.
Other types of investment professionals charge ongoing fees or an annual fee based on the size of the portfolio. These can include investment advisory fees — paid to an adviser for managing your portfolio; annual operating expenses — associated with the management and marketing of investment products like mutual funds and exchange-traded funds; 401(k) fees — associated with operating and administrative costs; and annual variable annuity fees — covering administration expenses.
If you pay an annual fee based on the size of your investment portfolio, you often pay a higher percentage the smaller the portfolio. There are also a variety of additional fees you might pay regarding your account, such as general maintenance fees, for not maintaining a minimum balance, costs for wire transfers and inactivity.
Whichever type of investment professional you choose, ask questions and make sure you understand the fee structure and the level of service you’re paying for.
Fees Can Shrink Your Portfolio
Recently, I participated in a retirement plan discussion at a teachers conference. I almost fell off my chair when I heard someone mention they paid a 15% fee to switch their investment. Fifteen percent! I quickly pointed out that fees alone, especially the ongoing kind, could eat up a huge chunk, if not all, of any gains for the investor.
Here’s how. Take for example, a 1% fee over a 20-year time period on a $100,000 investment. One percent doesn’t sound like a lot, but over time it can add up. With a 4% annual investment return, that 1% annual fee will reduce your portfolio by nearly $30,000 compared with the effect of a 0.25% annual fee. That’s a significant amount of money that could be working for you in other ways toward your financial future. For further details, check out our Investor Bulletin on “How Fees and Expenses Affect Your Investment Portfolio.”
Shop Around and Negotiate
There are thousands of investment professionals to choose from. Your first step is to make sure you’re dealing with a registered professional by conducting a free background check on Investor.gov. When you’re doing research, don’t be afraid to shop around for an investment professional who offers low fees. “Price” isn’t everything, but it’s certainly a key factor when considering which investment professional to work with. If you find one you like, but the fees are on the high side, ask if the firm will consider a lower fee. It never hurts to ask, and it may save you a ton of money in the long run.
Don’t Fuss — Get the Facts
Since fees can have a huge impact on your investment returns, make sure you ask your investment professional about them up front at the beginning of your relationship. Decide whether you think the investment advice you’re getting is worth paying a higher percentage fee or if you could get along with a lower annual fee or per transaction fee arrangement. Consider all your fee options and then choose what’s best to meet your financial goals.
The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or commissioner. This article expresses the author’s views and does not necessarily reflect those of the commission, the commissioners or other members of the staff.