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How Fund Expense Ratios Can Impact Your Returns

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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One of the trickier lessons for investors to learn is how to judge an investment fund by its price. Part of the reason is that funds don’t refer to their fees as having a “price.” Instead, funds have something called an “expense ratio.”

“The expense ratio is the only certain reduction of your return,” said Mark Hebner, wealth advisor, president of Index Fund Advisors in Irvine, Calif., and author of “Index Funds: The 12-Step Recovery Program for Active Investors.” That’s why understanding expense ratios and knowing what to look for can help you maximize the returns on your investments.

What is an expense ratio?

The expense ratio is the ongoing fee you pay to invest in a mutual fund, index fund or exchange-traded fund (ETF). It’s expressed as an annual fixed percentage of your invested assets — for example, 1% or 0.70%.

Included in the expense ratio are the costs of running the fund, from operations to administration, with small charges for accounting, legal, custodial or other service costs. If the fund is actively managed, the bulk of the expense ratio will go toward the investment advisory fee. There’s also something called a 12b-1 fee, or distribution fee, which some funds charge to pay for marketing to new investors.

How expense ratios work

Investors are not presented with a bill each year that states how much is due. Instead, expense ratios are taken directly from the fund. The expense ratio accrues daily as a percentage of your average invested assets, which can make it easy to miss.

But the expense ratio does impact your investment performance. To get a sense of how much, consider the number in real dollars. Invest $1,000 in a fund with a 1.5% expense ratio, and you’ll pay about $15 each year. Invest $100,000, and you’ll pay $1,500.

You also may think of it as a haircut of sorts in your annual performance. If your fund with a 1% expense ratio is up 10%, you will have returns of 9% after paying for the cost of the fund. That may not sound so terrible in good times, but it can be harder to bear in volatile markets — for example, when the fund is down by 10% for the year and you are down by 11% after fees.

Like price tags, expense ratios may not be the only factor in your purchasing decision, but they can help you evaluate and compare investments. Say you have $10,000 to invest and are considering an actively managed mutual fund with a 2% expense ratio to an index fund with a 0.5% expense ratio.

InvestmentExpense ratioAnnual cost on $10,000
Active mutual fund2%$200
Passive index fund0.5%$50

Perhaps the more costly investment adds value — enhanced performance returns, steady dividends, risk management — in a way that justifies its higher annual expenses. On the other hand, the mutual fund will have to outperform its benchmark by 1.5% just to keep up with the index fund.

How to find a fund’s expense ratio

If you are looking for a fund’s expense ratio, a good place to start is the prospectus, which is a detailed investment overview funds must file with the U.S. Securities and Exchange Commission (SEC). You can get a printed copy of a prospectus by contacting the fund company directly, and most fund websites include links to digital copies. Or you can find a prospectus on SEC.gov by searching for the name of the fund or fund company. Listed under the heading “Annual Operating Expenses” in the document will be a breakdown of all of the costs. Reading a prospectus isn’t everyone’s cup of tea, but it can be illuminating to see all the little line items that go into running a fund.

There are also some great websites — including Morningstar, MAXfunds and Kiplinger — that can give you a peek at a fund’s fees and help you compare low-cost options. When purchasing a fund from a broker, advisor or fund company, you can ask for a detailed explanation of the fees you will have to pay.

If you are so are inclined, you can calculate a fund’s expense ratio on your own by dividing total operating expenses by the average dollar amount of assets under management (often referred to as AUM).

What’s a good expense ratio?

Knowing how to calculate an expense ratio is one thing. But how do you know whether the expense ratio is good or bad?

“For the average person, you want the expense ratio to be as small as possible,” said Hebner.

The good news is average annual expense ratios have been on the long-term decline, falling by 40% over the past two decades. The average equity mutual fund expense ratio is currently 0.59%, according to the Investment Company Institute (ICI). The average bond mutual fund expense ratio is 0.48%.

Part of the reason expense ratios are declining is to keep up with index funds and ETFs, which tend to have below-average expense ratios, primarily because of lower operating costs and no active management fees. The average index equity mutual fund expense ratio is 0.09%, and the average index bond mutual fund expense ratio is 0.07%, according to the ICI.

Investors seem to be receiving the low-fee message. As of year-end 2017, the equity mutual funds with the lowest expense ratios hold more than three-quarters of total equity invested assets, according the ICI. Funds with the highest expense ratios hold only about 23% of the equity fund market. In August 2018, Fidelity began offering two no-cost index funds with a 0% expense ratio and then added two more the following month.

What’s not included in the expense ratio

There are additional fees not listed in the expense ratio that you may be charged when investing in a fund. Some can be avoided. Here is a rundown of what to look out for.

Shareholder fees

Under the general category of “Shareholder Fees” in the prospectus are several potential charges:

  • Sales loads.Some funds are sold through brokers who are compensated by fees paid by investors. These fees are known as loads or sales loads. They might be taken off the top of your investment when you purchase shares in the fund (front-end loads), or you may pay a deferred cost when you take your money out (deferred loads). That amount typically is a percentage of the assets invested and decreases as you invest greater amounts. According to Morningstar, the typical front-end load might be 4% on an investment of $50,000 or less; a typical deferred load might be around 5% but might decrease if you stay invested over time. The Financial Industry Regulatory Authority limits the sales load on a mutual fund to 8.5%. With so many desirable no-load funds for investors to choose from, there is little reason to pay a load fee.
  • Redemption fee. This is a transaction cost some funds charge when you redeem your fund shares. It is different from a deferred sales load because the fee does not go toward a broker’s compensation but pays the fund to defray the costs shared by all fund investors when you redeem shares in the fund. The SEC limits redemption fees to a maximum of 2%.
  • Exchange fee. If you exchange one fund’s shares for another, you may be charged this fee.
  • Account fee. If there is an account minimum to meet, you may be charged a fee for falling below the minimum.
  • Purchase fee. This is a transaction cost some funds charge when you purchase shares. Similar to the redemption fee, this differs from a sales load because it pays the fund to defray the shared costs associated with your purchase.

Trading costs

If there is trading going on in the fund, there will be associated broker and transaction costs. In actively managed mutual funds, where a lot of trading can occur, these fees can take a toll. A 2013 academic study called “Shedding Light on ‘Invisible’ Costs: Trading Costs and Mutual Fund Performance” found that investors paid an average of 1.44% in trading costs per year — often more than they paid in management and operational fees.

If you are buying an ETF, you also should pay attention to the trading costs you pay when buying and selling shares.

Taxes

As the fund buys and sells investments, capital gains and losses are incurred. All fund investors share the tax burden, which is paid for with fund assets. Taxes are a hidden fund cost that can take a toll on your investments.

Bottom line

You should never select an investment simply because it’s cheap, and you may have your own good reasons to favor a fund with an expense ratio that is slightly higher than average. Being aware of the expense ratio is like knowing the price of something; it helps you make a decision based on your priorities. Just keep in mind that the higher the expense ratio, the harder it is to beat or even meet the investment’s benchmark.

With average expense ratios on the decline, finding a low-cost fund that fits you is easier than ever — and it can help boost your overall returns.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Melissa Phipps
Melissa Phipps |

Melissa Phipps is a writer at MagnifyMoney. You can email Melissa here

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Investing

Ally Invest Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

If you’re looking for an online discount broker with no minimum investment requirement, Ally Invest may be perfect for you. Ally Invest is an ideal choice not just because you don’t need a fortune to open an account, but also because commission fees for trades are well below many competitors — especially for active traders who can earn discounts.

While Ally Invest is missing some common tools for investment research and their mobile app isn’t as feature-rich as some competitors, their full-featured online platform makes up for what the mobile app lacks. And, there’s a wide range of account options with Ally Invest, so you’re covered whether you want a taxable account, a retirement account, or an account for your kids.

Ally Invest
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The Bottom Line: Ally Invest is an affordable discount broker with a wide range of investments to choose from.

  • Commissions are just $4.95 or $3.95 if you’re an active trader.
  • There’s no minimum deposit required for a self-directed trading account, and no minimum account balance requirement.
  • Ally Invest offers tons of investment options, including stocks, bonds, mutual funds, options, futures and forex.

Who should consider Ally Invest

If you’re looking for an affordable investment account, Ally Invest should be at the top of your list. You’ll have many choices for different types of accounts with Ally Invest, including traditional and Roth IRA, IRAs for the self-employed, taxable investment accounts, 529 Plan, and more. And, you won’t have to make a minimum deposit to open your account — it’s free.

Once you’ve got your account open, Ally Invest makes trading affordable for most investments. Commissions for stock trades are among the lowest of any online discount broker, and Ally Invest offers more than 100 commission-free ETFs. If you’re looking to buy Mutual funds though, you’ll pay a transaction fee, whereas some competitors offer ample fee-free options.

Ally Invest’s online trading platform is easy to use, and their research tools are good. While you won’t find earnings transcripts, SEC filings, earnings press releases or audio calls, you can still dig into technical data using free screeners and other tools powered by Recognia.

If you don’t want to manage all the investments on your own, you can opt for a managed account. This is Ally’s robo-advisor option — but you’ll need a minimum of $2,500 if you’d prefer this hands-off approach rather than a self-directed trading account.

Ally Invest fees and features

Current promotions

New Ally Invest accounts accounts receive 90 days of commission-free trades, up to $500 in value, regardless of deposit amount. Cash bonuses are available for new accounts starting at $50 for if you deposit or transfer at least $10,000.

Stock trading fees
  • $4.95 per trade
  • $3.95 per trade (30+ trades per quarter or daily balance of $100,000 or more)
Amount minimum to open account
  • $0
Tradable securities
  • Stocks
  • ETFs
  • Mutual funds
  • Bonds
  • Options
  • Futures / commodities
  • Forex
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $50 partial account transfer fee
  • $0 inactivity fee
Commission-free ETFs offered
Mutual funds (no transaction fee) offered
Offers automated portfolio/robo-advisor
Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account(ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
Ease of use
Mobile appiOS, Android , Windows phone
Customer supportPhone, 24/7 live support, Chat, Email

Strengths of Ally Invest

Ally Invest has plenty of strengths to help it stand out from the competition, including the following:

  • Low commissions: You pay just a $4.95 commission with Ally Invest, which is one of the lowest commissions charged by discount brokers and well below the $6.95 charged by competitors including E-Trade and TD Ameritrade. Plus, if you make more than 30 trades per quarter or have a daily balance of $100,000 or more, your commission is even lower — it drops to just $3.95.
  • No minimum deposit required: While competitors such as E-Trade require a $500 minimum deposit to open an account, Ally doesn’t have any minimum initial deposit requirement. You can also earn a cash bonus for opening an Ally Invest account if you deposit or transfer just $10,000, compared with a $25,000 minimum to earn a cash bonus with E-Trade or $20,000 with Merrill Edge.
  • Powerful tools and intuitive trading platform: Ally Invest’s online site offers you powerful tools to screen investments. Its trading platform is intuitive and provides the features necessary to be an informed investor. This includes a dashboard you can customize to your preferred view, as well as real-time streaming quotes and up-to-date data.
  • Responsive online and phone customer service: You can contact Ally Invest via phone 24/7. There’s also an online chat feature, where you can get answers within seconds from helpful customer service agents. Email support is available as well.

Drawbacks of Ally Invest

Ally Invest also has some downsides to consider:

  • Mutual fund transaction fees: Ally Invest charges a $9.95 transaction fee per trade for no-load Mutual funds. But many competitors offer options without any transaction fees, including E-Trade, which offers more than 4,400 fee-free funds.
  • A mobile app with minimal features: While you can do the basics with Ally Invest’s mobile app, it offers far fewer features and investment tools than competitor apps such as TD Ameritrade Mobile.
  • No physical branches: Ally Invest is an online-only company. There are no physical branches, unlike for competitors such as Merrill Edge, or E-Trade which has more than 30 branches spread across the country.

Is Ally Invest safe?

Ally Invest is a trusted online brokerage with more than $4.7 billion in assets under management. It’s a member of the FDIC and SIPC, so you can rest assured that the cash in your accounts is safe. And since the company has passed its FINRA broker check, you can count on the fact it’s in full compliance with regulations.

Since Ally Invest is online-only, it’s important to review Ally’s data protection policies. The good news is Ally promises that they use “multiple levels of security” to keep your info safe. This includes 128-bit SSL encryption for any exchange of data from your browser and Ally’s servers if your personal information is being transmitted. The downside, however, is that Ally’s privacy policy does permit Ally to share your information with third-parties. While this is a common policy, it’s still disappointing.

Of course, once you invest your money, there’s always a risk of losses. Research what you’re investing in carefully and diversify your portfolio to minimize risks you’re taking.

Bottom line

Thanks to the fact it has no minimum deposit requirement, Ally Invest is a great choice if you’re looking to get started investing and you don’t have a ton of money. Affordable commissions and commission-free ETFs also give you a diverse offering of low-cost or no-cost investment options. But if you’d prefer to buy Mutual funds without paying transaction fees or want a physical branch to visit, alternatives such as E-Trade or Merrill Edge may be a better choice to meet your needs.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christy Rakoczy
Christy Rakoczy |

Christy Rakoczy is a writer at MagnifyMoney. You can email Christy here

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Investing

Ally Invest Managed Portfolios Review 2019

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Ally Invest Managed Portfolios is a robo-advisor option from a trusted online-only financial institution.

It can make managing your money simple: Just answer a few basic questions about your goals and risk tolerance and your funds are invested for you. However, while fees are competitive, they aren’t the lowest among other robo-advisors’ offerings.

If you don’t mind the lack of bonus for opening the account, and you want to take a hands-off approach to building wealth, Ally Invest may be a good option.

Ally Invest Managed Portfolios
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The Bottom Line: Ally Invest Managed Portfolios is a decent robo-advisor that’s competitive with other managed portfolios online. But its lack of tax-loss harvesting, and fees that slightly exceed competitors may prompt you to look elsewhere if you’re not already an Ally customer.

  • The minimum deposit to invest in Ally Invest Managed Portfolios is $100
  • 0.00% management fee, no matter how high your account balance
  • Customer service is available 24/7, but there are no local branches to visit

Who should consider Ally Invest Managed Portfolios?

If you’re looking for a robo-advisor that allows you to build a diversified portfolio without a lot of advanced knowledge about investing, Ally Invest Managed Portfolios has you covered.

You’ll answer a few questions about your age; timeline for investing and risk tolerance; and whether you’re investing for retirement, wealth-building or a big purchase. Then, Ally Invest comes back with a recommended portfolio you can accept or tweak.

You can open a joint, custodial or Individual taxable account with Ally Invest Managed Portfolios, or can opt for a Traditional IRA, Roth IRA or Rollover IRA. Unfortunately, unlike with Ally Invest’s self-directed accounts, there’s no promotion or bonus for transferring funds into a managed portfolio. And, you’ll need quite a bit of money to get started — more than many competitors in the robo-advisor industry require.

Still, if you don’t mind the lack of brick-and-mortar locations and marginally higher fees, Ally Invest is a worthy competitor to consider when looking for help managing your money.

Ally Invest Managed Portfolios fees and features

Amount minimum to open account
  • $100
Management fees
  • 0.00%
Account fees (annual, transfer, inactivity)
  • $0 annual fee
  • $50 full account transfer fee
  • $50 partial account transfer fee
  • $0 inactivity fee
Current promotions

None currently

Account types
  • Individual taxable
  • Traditional IRA
  • Roth IRA
  • 529 Plan
  • Joint taxable
  • Rollover IRA
  • Rollover Roth IRA
  • Coverdell Education Savings Account (ESA)
  • Custodial Uniform Gifts to Minors Act (UGMA)/Uniform Transfers to Minors Act (UTMA)
  • SEP IRA
  • SIMPLE IRA (Savings Incentive Match Plan for Employees)
  • Trust
Portfolio
  • Ally managed portfolios cover 3 asset classes and 9 major market segments
Automatic rebalancing
Tax loss harvesting
Offers fractional shares
Ease of use
Mobile appiOS, Android, Windows Phone
Customer supportPhone, 24/7 live support, Chat, Email

Strengths of Ally Invest Managed Portfolios

Ally Invest Managed Portfolios has some significant advantages worth considering:

  • Investing in a diversified portfolio is easy. You’ll answer basic questions about your investment goals and Ally Invest will suggest a portfolio with an appropriate mix of U.S. and foreign bonds, international and U.S. stocks, and cash. You can also tweak the suggestions Ally Invest Managed Portfolios makes, so you take on more or less risk based on your comfort level.
  • Ally requires a low minimum deposit of just $100 to open a managed portfolio account. While some of Ally’s competitors (such as Betterment) don’t have a minimum deposit requirement at all, $100 still falls on the very low side of the scale and makes this account extremely accessible to new investors.
  • Ally Invest Managed Portfolios offers automatic portfolio rebalancing. This helps to ensure you remain invested in the right mix of assets if certain investments under- or over-perform.
  • Customer service. Ally Invest offers phone, Email, and chat support. Customer service agents are available 24/7 with little or no wait. Agents will do their best to provide answers, although it may take a little time if your questions are technical since you may need to be transferred to an investment advisor.

Drawbacks of Ally Invest Managed Portfolios

You’ll also want to consider the potential downsides of choosing Ally Invest Managed Portfolios.

  • Ally Invest Managed Portfolios charges fees that are slightly higher than several competitors. You’ll pay .30% for Ally’s robo-advisor service, compared with .25% for Betterment’s digital account or for Wealthfront.
  • Ally Invest Managed Portfolios currently does not offer tax loss harvesting, which involves selling investments at a loss to offset taxable gains (although they do offer tax advantaged portfolios which add municipal bonds to Ally’s core portfolios). Competitors such as Betterment do offer this feature. However, Ally representatives indicate tax loss harvesting is expected to be rolled out in 2019 and investors with managed portfolios will be able to transition their accounts into a portfolio with tax loss harvesting.
  • No physical branches. If you’d prefer to go into a branch for local customer support, you’ll need to look elsewhere, such as E-Trade, which has more than 30 branches across the country.
  • Mobile apps aren’t very advanced. While Ally Invest allows you to use mobile apps on iPhone and Android phones to access basic account information, the offered apps aren’t as feature-rich as competitors such as Betterment.

Is Ally Invest Managed Portfolios safe?

Whenever you invest your money, there’s a risk you may lose some or all of it. This is no different with Ally Invest Managed Portfolios. The assets your robo-advisor invests you in could decline in value and your portfolio could lose money.

But Ally Invest is as safe as any trusted online brokerage, and there’s little risk of losing assets if the investment firm goes bankrupt. Ally Invest is in compliance with regulatory requirements according to FINRA’s Broker Check tool. Ally Invest is also a member of the FDIC and SIPC, both of which ensure cash in bank and brokerage accounts respectively.

Final thoughts

Ally Invest Managed Portfolios is a viable choice for investors looking for an easy, hands-off way to invest — especially with its low $100 minimum deposit requirement. Ally also promises to offer a broad range of socially-responsible portfolios, which should interest investors who want to consider more than just financial returns. But the lack of a promotional offer, higher management fees, and the fact tax loss harvesting isn’t currently offered makes Ally a less-than-ideal option for investors looking for the most affordable way to build a diversified portfolio. If you want a lower-cost option that does offer tax-loss harvesting, consider robo-advisors such as Betterment or Wealthfront.

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Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Christy Rakoczy
Christy Rakoczy |

Christy Rakoczy is a writer at MagnifyMoney. You can email Christy here