Keeping Management Fees Low

Mutual funds and ETFs are pretty good investments, except for one aspect – the fees.  Mutual funds and ETFs charge all types of fees – many of which are part of the “expense ratio”, but others are straight up front.  Here is what you need to know about mutual fund and ETF management fees.

What Fees to Expect

There are two basic fees to expect: shareholder fees (which are charged directly on the investor at the time of the transaction) and annual operating expenses (which are recurring and fund wide operating expenses).  Both directly impact you as an investor.

Shareholder Fees:

–          Sales Load: This is a commission that funds charge that essentially compensates the broker who sells the mutual fund.  This is separate from a commission, which could also be present.  It is important to note the even “no-load” funds have fees beyond the sales load, so be aware.

–          Redemption Fee: A redemption fee is a fee that some funds charge when shareholders redeem their shares.  This is not a deferred sales load, since it is paid directly to the fund.

–          Exchange Fee: A fee that some fund companies charge to change funds from one to another

–          Account Fee: A fee that some fund companies charge to “maintain” their account

–          Purchase Fee: This is a fee charged by the mutual fund that is intended to compensate them for the cost of purchasing shares

Then, you have the annual operating expenses, which are typically expressed as a percentage:

–          Management Fees: These are paid to the fund’s investment adviser for managing the fund

–          Distribution Fees: This is essentially for marketing materials in connection to the fund, and cannot legally exceed 0.75%

Typically, a fund is considered to have high fees if the fees exceed 1% annually.  However, do consider that costs for some funds may be higher because of where they invest – for example, emerging market funds typically have higher fees because the transaction costs of doing business in these markets is more expensive.

Why You Need to Keep Fees Low

You need to keep your expenses low because they really eat away at your return.  For example, $10,000 invested for 20 years at an average annual return of 10% would yield you the following:

–          At 1.5% annual expenses: $49,725

–          At 0.50% annual expenses: $60,858

That is almost $10,000 difference over 20 years, or over 15%.  That really eats into your total return.

How You Can Be Aware

You need to be aware of a mutual fund or ETFs expenses every time before you invest.  You can find this information by checking out the fund’s prospectus, which is usually available online, or can be ordered through your broker.  Also, many websites like Google Finance or Yahoo Finance post the expense ratios on their sites.

If you are concerned about a fund’s expenses when investing money, look for similar funds in the same sector by using a tool like Morningstar.  That way you can find other great funds, with lower expense ratios.

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