How much you’re paying in investment fees can depend on what type of investments you own and the services offered by your financial advisor. Below, we’ll break down some of the more common investments and offer you tips on how to calculate the fees you’re paying.
The annual fees for investing in mutual funds are known as a fund’s “expense ratio.” These are calculated by dividing the fund’s operating expenses by the average dollar value of its assets under management. Operating expenses are taken out of a fund's assets and lower the return to a fund's investors.1
There can also be other fees associated with mutual funds, such as those incurred through investor purchases, mutual fund exchanges and redemptions, investment advisory fees, marketing and distribution expenses (also known as 12b-1 fees), brokerage fees, and custodial, transfer agency, legal, and accountant’s fees.2
We realize this seems like a lot to swallow, but the best way to dig into the details of all the associated fees is through reading the fund prospectus, or better yet, by asking your financial advisor to walk you through each fee one by one.
Investment fees associated with ETFs are a bit simpler than mutual funds, as typically there are only four things to consider: commissions, operating expenses, bid/ask spreads, and changes in discounts and premiums to net asset value.3 Your financial advisor should be able to walk you through each point, or give you a total fee, if you own ETFs in your portfolio.
If you’re investing on your own, there is a great mutual fund and ETF fee calculator created by the Financial Regulatory Authority Agency (FINRA). Simply import your tickers to run the fee reports.
One of the more difficult investments to calculate fees. The main investment fees to consider are insurance charges (mortality and expense, administrative fees), underlying investment management fees, surrender charges, rider fees (if any), and flat contract fees.4
All fees are listed in the prospectus, but typically with annuities the prospectus resembles an encyclopedia! Investors should urge their financial advisors to give a detailed explanation of all fees associated with annuities, and also if an annuity is appropriate for them.
We believe Separately Managed Accounts (SMAs) often have the easiest investment fees to calculate. Typically, SMAs charge an annual fee as a percentage of assets under management, often in the 1% – 2% range. You can find the exact fee structure in the Form ADV2, which you can get from your financial advisor.
If the investment fees are paid each quarter, it can often be as simple as taking the annual fee rate, divide it by four, and then multiply it by the dollar amount of assets under management at the end of the quarter—making for an easy number to calculate and interpret.
Chances are investors hold one or a few of the products mentioned above. If that’s the case, it can be quite time consuming and difficult to calculate how much you’re paying in investment fees. But that does not make it any less important! The investment fees you pay can take away from total return, and in addition your fees should also be covering other services you should receive from your financial advisor.
If you want help determining how much you’re paying in fees and whether you could get better service and value some other way, please call one of our Wealth Managers at 1-800-541-7774 and ask for help. We can help you answer these questions and potentially help you find an alternative investment solution.
Sources:
2 SEC
4 Fidelity