Maybe you’re new to the workforce. Or perhaps you just started earning a good amount of income and you can finally afford to invest your money.
As a new investor, you are probably keen on making money when allocating your funds in an investment account, like a mutual fund, 401(k) or directly in the stock market. However, what is often forgotten is that, like any other financial service, there are likely fees to contend with at every corner. There are some investing fees that beginner investors in particular might not know about — or often forget — in their quest for increased wealth.
Even experienced investors underestimate how much of their precious savings or income can be lost to fees. In fact, a 2013 post on Forbes.com estimates that investors lose up to 40 percent of their return due to fees.
Let’s look at five fees beginner investors often overlook, how these fees are encountered and how you can best avoid or minimize these fees.
1. Trading Costs
Trading costs are fees charged by brokerage firms to sell or buy a security, said Shaun Erickson, a certified financial planner and partner at Single Point Partners in Boston.
These fees are also called commissions. Of course, the more trades you make, the more fees you will pay. One way to reduce trading costs is to trade less frequently. In addition, trading costs can be the highest with traditional stockbrokers and wirehouses — as high as $200 per trade, he said. While these fees typically cannot be avoided entirely, another tactic to reduce trading costs is to do business through a low-cost firm such as Fidelity or E*Trade, Erickson said.
Also, look for firms that offer no transaction fees on certain exchange-traded funds. And if you opt to receive your investment statements electronically, you might receive reduced trading costs in return, he added.
2. Brokerage or IRA Fees
Often, financial advisors will open a Roth IRA as a brokerage account for a client and invest all of the money into one mutual fund family, said Timothy M. Scholten, chartered mutual fund counselor and vice president of Gilliland Lee Financial Group, in Dublin, Ohio. This allows the advisor to see all of your money on one consolidated statement; however, it also costs you an annual fee of $40 to $50.
Instead, ask your financial advisor to hold your assets directly with the mutual fund family. Your annual fee will only be $10 to $15 per year in this scenario, he added. You will still have the same access to your account online and through statements. This fee is also called an annual maintenance fee, IRA fee or brokerage account fee, he said.
3. 12b-1 Fees on Mutual Funds
Some investment funds carry a 12b-1 fee, also sometimes called a distribution fee. This fee is meant to cover marketing for the fund and can be present on both load or no-load funds, said Gary Silverman, a certified financial planner and founder of Personal Money Planning, a fee-only investment management and retirement planning firm in Wichita Falls, Texas.
To find out if you are paying this fee, open the prospectus for your fund and look for the “fees and expenses of the fund” section. “You’ll find a line called ‘distribution and/or service (12b-1) fees.’ If it is not zero, you’re paying it,” Silverman said.
To avoid this fee, which typically is 0.25 percent to 1 percent of your investment, you will need to change the funds you are investing in. Companies such as T. Rowe Price, Fidelity and Vanguard offer funds without the 12b-1 fee, he added.
4. Withdrawal Fees
Starting out as a new investor, you might be unsure where to put your money. While it’s easy to open a new account, if you close it too soon or take a distribution of money, you might incur a penalty fee. These fees might are also called distribution fees or early distribution fees.
Retirement accounts in particular, such as a Roth IRA or traditional IRA, come with withdrawal fees if you take money out of the account before a specified retirement age. For IRAs, this age is 59½, and the penalty fee can be as much as 10 percent of the amount of money distributed.
Avoid this fee by planning well and fully understanding the type of account you are opening. If you plan to use the funds early or would prefer liquidity in your investment account, ask a financial professional to recommend account options with low or no withdrawal fees.
5. Expense Ratios
The expense ratio — for mutual funds, ETFs and closed-end funds — is essentially a convenience fee, said John Fowler, a certified financial planner= and wealth manager at MSCM in Dallas. This fee — also called a management fee — can include other fees, such as the 12b-1 fee.
<“Buying a mutual fund, ETF or closed-end fund helps you avoid these individual transactions, and therefore the fund company sees fit to charge you an expense ratio,” he said.
The average expense ratio for open-end mutual funds was 0.71 percent in 2014, Morningstar calculated. This means that for every $10,000 you invest, you will pay $71, Fowler said. To avoid this fee, consider index mutual funds or ETFs, which typically have lower expense ratios.
Related: 31 Worst Fees in America
Investing fees are all around, but by arming yourself with basic knowledge about investing and seeking out a qualified, trusted financial advisor or planner, you can move ahead with your saving and investing goals with confidence.