Dave Ramsey: What You Need To Know About Investment Fees

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With every investment comes a side of fine print — that stuff you may not want to work out, but really should anyway. It’s important to research everything carefully so that you can invest with confidence and wisdom. An example of something you should definitely take the time to understand are investment fees. 

On May 31, financial guru Dave Ramsey posted a blog on his site, Ramsey Solutions, called “Everything You Need To Know About Investment Fees.” Fairly self-explanatory title, but the article is actually pretty in-depth and gets into the nitty-gritty of costs associated with mutual funds.

Let’s focus on the key takeaways and explanations.

What Are Investment Fees? 

First things first: What are investment fees? As the Ramsey Solutions post explains, investment fees are charges investors pay to use select financial products and services. Types of investment fees vary. Here are some common ones.

Loads

These are essentially sales commissions on purchased stocks. “Whenever you see the word load, just think of a sales charge or a commission,” said the Ramsey Solutions article. “That’s the load.”

There are three types of loads: 

• Front-end load. “When you invest in a mutual fund with a front-end load, you are charged when you put money into your retirement fund,” according to Ramsey Solutions. “So if you invest $1,000 in a mutual fund that has a 5.75% front-end load, you’ll pay an upfront fee of $57.50 and your initial investment will be reduced to $942.50.” These can be attractive because they’re one-time expenses. 
• Back-end load. “Back-end loads are charged when you take money out of your retirement account. The catch is that these loads often have higher fees that you have to pay regularly.”
• No-load. “With a no-load fund, you aren’t hiring an investing pro, so you don’t have to pay commission…and that might seem more attractive at first,” said the Ramsey Solutions post. “But no-load funds can cost you big time in the long run.” They’re costly in that they carry risk since you’re going it solo, without the guidance of an investing expert. Plus, some no-load funds have yearly maintenance fees that “will make you wish you’d paid commission instead.”

Other Fees

• Management fees. “The stocks that make up your mutual fund didn’t end up there by accident,” said the Ramsey Solutions article. “There are a bunch of professional nerds — led by a portfolio manager — who make sure that only the best investments make the cut. These fees help them manage the fund well.”
• Distribution and service (12b-1) fees. These fees pay for the fund’s marketing costs, or “how much it takes to promote the fund.” 
• Administrative fees and operating costs. “These cover things like salaries for the fund’s managers, record keeping and research.”
• Advisory fees. “If your pro charges an advisor fee as part of their payment structure, it might show up as an assets under management fee. Under this arrangement, fees are charged each year as a percentage of how much money your pro manages for you.”  
• Broker fees and trading fees. “Every time you buy, sell or exchange shares of a stock or ETF, you’ll be charged transaction fees (also called trading fees),” wrote Ramsey’s website. “Depending on the platform and services used by your broker, you could pay anywhere from less than $5 to more than $20 as a transaction fee.”  

How Often Are You Charged Investment Fees? 

Investment fees may be imposed in two ways: 

• Ongoing fees. These fees are incurred on a regular basis (could be quarterly or annually). Usually they’re charged as a percentage of the funds in your account. 
• Trading fees/transaction fees. These are flat fees or one-time transaction charges. 

How Do Fees Impact Your Investments and Which Are Best?

Ramsey’s website points out that recurring fees can eat into your investments over time, which is why he favors front-end loads (this is the one where you pay a chunk at once, upfront, instead of on a regular basis). 

“Over time, they’re the least expensive way to invest,” said the Ramsey Solutions post. “And the commission you pay upfront really isn’t a lot to pay to have someone on your team, teaching you how to invest successfully. You need a pro to help keep you on track through the twists and turns of investing!”

But this is a pretty complex matter and you need to do what works for you. When you’re investing in a mutual fund, Ramsey Solutions recommends that you do the following: 

• Look for the value. 
• Focus on the long term. 
• Understand your overall costs. 
• Work with a professional who can help and guide you through this intricate world. 

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