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Business/Finance See other Business/Finance Articles Title: One-Stop Guide to Investor Fees If you have a 401(k), odds are you received some new information from your retirement plan this week. New regulations required administrators of 401(k)s to disclose detailed plan costs to their clients in June. The information had to be sent by the end of August. Of course, that doesn't make the information easy to understand. The fine print, coupled with seemingly low percentage fees that add up to a lot over time, tends to deter or confuse many investors. The problem isn't limited to retirement accounts either. Even when an investor is fully aware of how much their broker or brokerage is collecting from them, they rarely are able to tell how much a different type of account or investment could cost or save them. Here is a look at the average costs of different services and why you are paying certain fees. If you are paying more, it is time to call your broker and see if you can renegotiate your terms. At the very least, they should be able to justify why they collect more than others. Get your money into your account, not your broker's pocket. Brokerage Charges - $5 to $10 per trade, up to 5% front-end sales loads. Costs can vary widely when you buy stocks or funds directly from a brokerage. For discount brokerages, you can expect to pay $5 to $10 whenever you place a trade. The price will jump an extra $25 if you get help from one of their brokers. Other traditional brokers sometimes charge much more by building fees or expense ratios into the products they are trying to sell. For example, mutual fund companies often charge an investor a a one-time "sales load" or a recurring "12b-1" fee. A typical sales load on a purchase of less than $25,000 is 5%. The fees slide down as the purchase gets larger. When someone spends $1 million or more, the fees are usually waived. Real Estate Investing – Variable, anywhere from .5% to 6-7% The amount of money you are paying is highly dependent on how you choose to invest in real estate. If you are purchasing a property on your own, all of the broker, lawyer, agent and paperwork fees quickly add up to 6% to 7% of the property cost, if not more. These fees are negotiable, so you can beat the average, or pay too much, depending on who you choose to work with and the deal you can hammer out. Real estate investment trusts (REITs) have expense ratios that vary from 0.5% for index funds to 2% for actively managed options. The median real estate fund will collect 1.15%. Actively Managed Mutual Funds – 0.66% to per year for bond funds, 0.93% for equity funds. You are paying to get access to their investment professionals. According to the Investment Company Institute, the average expense ratio is 1.43% per year. Most people clearly favor the less expensive options. About 72% of assets at the end of 2011 were in the cheapest 25% of equity funds. The cost jumps if you buy into alternative funds. These funds average out to about a 1.3% asset-weighted expense ratio, according to Morningstar. Alternative funds are a double-edged sword. They buy up commodities or other assets that provide a hedge missing from traditional stock and bond mutual funds. That could boost your gains. It could also reduce them if the fund is poorly managed. Index Mutual Funds – 0.13% for bond funds, 0.14% for equity funds Index funds are incredibly cheap because there is no one at the wheel. They simply create a long list of diverse bonds or stocks and ride it out. Many brokers cannot beat the market consistently with individual stock or bond picks, so the basic idea is to not even bother paying someone to try and to pocket the savings. All Mutual Funds – 0.2% to 2.7% in addition to other fees Transaction costs hit active and index mutual funds. Researchers don't agree on how to count these transaction costs, which only makes the situation more confusing. The cost really depends on how the investments are managed and the trading volume of the mutual fund. Exchange-Traded Funds – 0.49% on average for non-leveraged ETFs in the U.S.A. A vast majority of ETFs are based on an index of similar equities or companies in a sector. This keeps the average pretty close to index mutual funds, but new types of ETFs have much higher costs. These actively managed funds average a 1.5% expense ratio. Individual ETF costs are increased depending on how money is moved between positions and trading volume. Hedge Funds – 1.5% average annual management fee plus 20% of any gains You are essentially paying for a couple hotshot investors to beat the market. They better be good at it too. Their job depends on their ability to provide competitive returns while skimming 20% of all gains. If they cannot do that, people pull their money and they go belly up. New funds tend to charge higher annual management fees, but they rarely outperform established hedge funds over time. Financial Advisors – 0.5% to 0.95% If you choose to consult a financial advisor, for which there are many names, you are essentially paying for detailed and personalized advice. These advisors will provide investment and other financial advice for an annual charge based on the size of your assets they manage. As the asset size increases, the percentage charged decreases. With less than $250,000 in assets, you can expect to pay 0.95% on average. If you have more than $50 million, you can expect a fee around 0.3%. 401(k) Plans – 0.13% to 1% in administrative costs plus wildly variable other fees These retirement plans can greatly differ in cost and performance. The largest factor for the cost that is passed on to you is the size of your employer. The more people an employer brings into a plan, the less it, and subsequently you, are charged. You are going sharing the costs of all the basic needs of an office, such as administrative costs, business expenses, payroll, marketing, mailed information and everything else. After all of that, you are going to be paying for the plan administrators to invest in whatever you are allowed to allocate money towards. The average plan has a total cost of 0.87% percent per year, and all but 0.13% of that covers managing investments. Your only real option to reduce costs, outside of getting a new job, is to choose low-fee index funds for your account. They often will not charge the same “revenue-sharing” fees that come with more actively managed 401(k) options. That probably isn't a good choice in the end though. Your account will be limited to the whims of the market, for better or worse. +8 Post Comment Private Reply Ignore Thread
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