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8 Investment Fees Every Investor Needs to Understand

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

While the focus in investing is often on returns, it’s important for investors to understand the impact of expenses on their investing results.

An investor bulletin published by the Securities and Exchange Commission (SEC) shows the effect of higher expenses on investment returns. They looked at the impact of expenses on a hypothetical $100,000 investment held for 20 years. The SEC assumed a 4.00% annual rate of return, with annual expenses at 0.25%, 0.50% and 1.00%.

Here is the impact of these expense differences on returns:

  • Over 20 years, incurring annual expenses of 0.50% reduced the end value of the portfolio by about $10,000 versus if the annual expenses had been 0.25%.
  • Over 20 years, the portfolio incurring 1.00% in annual expenses had an ending value that was $30,000 less than the same portfolio with 0.25% in annual expenses. According to the SEC’s analysis, this difference in expenses over the 20 years adds up to an additional $28,000 in expenses over this time period. If that money had been available for investment, the investor might have earned an additional $12,000 in returns over this time period.

As you can see, a relatively small difference in the level of expenses incurred by an investor can really add up over time.

There are numerous added costs that investors need to be aware of. These eight common fees and expenses can easily eat into your returns.

1. Expense ratios

Mutual funds and ETFs carry expense ratios that pay for expenses such as administration, trading costs to buy and sell securities held in the fund, and other costs to operate the fund. The expense ratio is calculated by dividing the total operating expenses of the fund by the fund’s total assets.

The returns that investors receive from mutual funds and ETFs are net of expenses. For example, if a fund’s gross return was 10% for the year and its expense ratio was 1%, your net return would be 9% for the period. This is a simplified example as things like your holding period for the fund, investments and distributions during the holding period, combined with the fact that mutual fund accounting is a bit complex all factor in.

What this means is that all things being equal, if you are looking at two funds in the same asset class, the fund with a lower expense ratio would start with an advantage. In the case of an actively managed fund, you will want to look at many other factors beyond expenses. In the case of an index fund, you will want to be sure to compare funds that track the same index such as the S&P 500 or the MSCI EAFE (EAFE stands for Europe, Africa and Far East) index.

2. 12b-1 fees

Some mutual funds carry a 12b-1 fee, which is lumped in as part of their expense ratio. This is considered a marketing fee and is used to compensate brokers, registered representatives or advisors for selling or recommending the fund. These fees are sometimes also used in a 401(k) plan to cover a portion of the plan’s administrative costs and/or to compensate the plan’s outside advisor.

The higher the 12b-1 fee, the higher the fund’s expense ratio will be.

3. Sales loads

A mutual fund load is essentially a sales commission tied to certain mutual funds. Mutual funds with a sales load are usually associated with stockbrokers or registered representatives who are compensated through commissions.

There are two types of loads.

Front-end loads

Front-end loads are a charge assessed at the time that the fund is purchased. They are typically associated with A-shares. The front-end load is deducted from the amount of your money that is ultimately invested in the mutual fund.

As an example, assume the initial investment in a fund is $10,000 and the front-end sales load is 5%. The amount of the sales load would be $500 and the amount invested in the mutual fund is $9,500.

The front-end load goes to compensate the brokerage or advisory firm selling the fund. You may pay these loads in addition to any other fees you are paying for advice. The load reduces the amount invested and ultimately the amount of money you accumulate over time from investing in the fund.

For example, $10,000 invested in a fund on January 1 that earns 10% for the year will grow in value to $11,000 by the end of the year. If only $9.500 was actually invested, the amount you’d have at the end of the year would be $10,450. This would multiply itself over time and the discrepancy in the value of your investment would grow over time.

Back-end loads

Back-end loads have been typically associated with B and C share class mutual funds. B shares have largely gone by the wayside in terms of new sales, but there are certainly some shares out there held by investors.

In the case of B shares, there was no upfront sales charge or load, but the back-end load serves as a surrender charge instead. This means that if you sell the shares prior to the elapse of a set time period, the net proceeds to you from the sale would be reduced by the amount of the back-end load. Typically, these back-end loads decrease over time and disappear altogether at the end of the surrender period.

As an example, if the back-end load was 3% when the shares were sold after holding them for four years, selling $20,000 worth of fund shares would only net you $19,400 after the back-end load was assessed.

C-shares use another form of the back-end load which becomes a level load over time. A typical C-share mutual fund will include a 1% back-end loan that works as follows:

  • There is a level load in the form of a 12b-1 fee, which is generally 1% on the fund. This is part of the expense ratio and typically never goes away as long as you hold the fund.
  • If you sell during the first year after investing, the 1% turns into a surrender charge that is assessed on the proceeds of the sale of the fund.

4. Surrender fees

Surrender fees may be assessed on some annuities and mutual funds. A surrender fee is a percentage of the proceeds if the investment product is sold within a certain period of time.
A surrender period may last for a number of years, with the surrender fee decreasing over time. The purpose of the surrender fee is to discourage investors from selling the annuity or the fund prior to the end of the surrender period.

If a surrender charge of 2% is in place at the time an investor sells shares of a variable annuity worth $30,000, then the proceeds of the sale will be reduced by $600 in this case. This is a direct reduction of the overall return on this investment.

5. Financial advice fees

Fees for financial advice will vary depending upon the type of financial advisor that you work with. There are three basic advice models. However you pay for financial advice, it is still a cost and one that you need to understand and manage.

Fee-only advisors

Fee-only advisors charge a fee for the advice they render. There are no commissions or sales of financial products. Fee-only advisors will typically charge in one of three ways:

  • Assets under management (AUM): Under this scenario, the advisory fee will be a percentage of the investment assets for which the advisor is providing advice. A typical fee might be 1% of assets. If you have $250,000 under advisement with the advisor, then your fee would be $2,500 annually. Typically, the fee would be charged based on the total assets under advisement at the end of each calendar quarter based on the annual percentage. In our 1% example, this would be 0.25% per quarter. Often advisors will scale their AUM fees to be lower for clients with higher levels of assets and vice versa for clients with smaller accounts.
  • Flat retainer fees: Some advisors will charge a flat fee that is not based upon an asset level. They may have different fee levels based on the complexity of your situation or other factors.
  • Hourly or project fees: Some fee-only financial planners and financial advisors provide advice on an as-needed or on a project basis. Their fee may be hourly or on a flat-fee basis for a specific project such as a financial plan or a review of your portfolio.

Commission-based advisors

Commission-based advisors are compensated through commissions from the sale of financial products. This might include sales loads from mutual funds or commissions from the sale of insurance products like annuities. These advisors must sell investment and financial products to get paid. Often the true cost of commissions is buried in the expense structure of the product being sold.

Commission-based advisors have the duty to propose suitable investments to their clients, this is a lower standard than acting in their client’s best interest. Therefore, a hidden cost might be that the product sold to you is not the best one for your situation.

Fee-based or fee-and-commission are both names for advisors who are compensated by a combination of fees and commissions from the sale of financial products. An advisor might produce a financial plan for you for a set fee, then implement their recommendations made in the plan through the sale of products that pay them commissions.

Fee-based and fee-only may sound alike, but they are decidedly different compensation methods and investors should understand how they differ. Fee-based has gained a level of popularity in recent years with the advent of the now ill-fated fiduciary rules.

6. Brokerage wrap fees

A brokerage wrap account is a managed account offered by brokerage firms. They will invest your assets in a fashion that is in line with your situation. The assets in the account are often mutual funds but could include ETFs or individual stocks as well.

Wrap accounts have gained in popularity during recent years as many brokerage firms have moved towards offering fee-based type products.

The wrap-fee is a management fee paid to the brokerage firm for managing the account. Wrap-fees can vary, but a typical range is 0.75% to 3% of the assets invested in the account. On top of that, the account may use mutual funds that pay a fee to the brokerage firm either through their 12b-1 fees or another method.

7. Transaction fees

Transaction fees are fees assessed for buying and selling investments. In addition to front-end loads and surrender charges discussed above, there are other types of transaction fees to be aware of.

  • There may be a cost to buy or sell shares of a mutual fund. This may be assessed at certain custodians for certain funds. For example, Vanguard charges $20 per trade for certain non-Vanguard funds if bought or sold online and $50 if bought or sold by phone.
  • There may also be a transaction fee to buy and sell exchange-traded vehicles such as ETFs or shares of individual stocks. For example, Fidelity offers $4.95 trades for many ETFs and stocks.

Note that transaction fees can vary widely from custodian to custodian, so it is wise to investigate. There are also a number of funds available on an NTF basis meaning there are no transaction costs to buy or sell.

8. 401(k) fees

In some cases, the fees and expenses associated with a company’s 401(k) plan might be assessed all or in part against the plan participant’s accounts. This could include costs for administration, recordkeeping and fees associated with an outside investment advisor for the plan. These costs do have to be disclosed, but make no mistake they are real, and they do reduce your returns within the plan.

Bottom Line

The fees and expenses discussed above are paid in a variety of ways, some not always transparent.

  • Advisory fees may be paid directly by check, they may be billed to your investment account and taken from the assets in the account or they may be paid from 12b-1 fees that are part of the mutual fund expenses.
  • Advisors may be compensated directly from the investments they sell or recommend to you using trailing commissions or other means.
  • Expense ratios directly reduce the net return you realize from investment vehicles like mutual funds, ETFs and variable annuities.

It is important that if you are working with a financial advisor or a broker that you fully understand ALL costs related to working with them and how they will be compensated for the advice they provide.

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Asset Management vs Wealth Management: What’s the Difference?

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

Asset management and wealth management may seem like interchangeable terms, but they are quite different in practice. Asset management is when you hire someone to direct your investments, while wealth management is advice that addresses every aspect of your financial life, from cash flow to goal planning to insurance coverage. Whether you need one or the other will depend on your situation and stage in life.

What is asset management?

Asset management is the practice of advising and managing investments. If you hire a financial professional to manage your assets, that’s their only focus: the performance of your portfolio, evaluation of your risk and the allocation of assets in investments.

“Ultimately, it’s understanding a client’s goals and developing, implementing and managing a set asset allocation to help a client reach those goals,” said Trevor Scotto, a financial planner in Walnut Creek, Calif.

An asset manager can help you design your portfolio, monitor it over time and distribute the assets as needed. “When someone needs to start distributing assets from their portfolio, an asset manager will help them structure the most intelligent and tax-efficient process,” said Alex Caswell, a financial planner in San Francisco.

What services does asset management offer?

Typically, an asset manager will offer the following:

  • Risk assessment
  • Portfolio design
  • Investment rebalancing
  • Tax minimization strategies
  • Monitoring of investments and investment options
  • Asset distribution

What sort of clients does an asset manager serve?

A typical client for an asset manager might be someone just starting out in their career who needs guidance on setting up their portfolio, or someone with a simpler financial situation in general. They might not have the wealth or complicated money scenario that lends itself to more involved wealth planning.

“On the other side of the spectrum is more of a do-it-yourselfer,” Scotto said. This kind of client might want to manage the rest of their financial lives themselves, along with a bit of investment guidance.

What is wealth management?

Wealth management takes a big-picture view of your finances, from estate planning to insurance coverage. Wealth management includes asset management — but instead of just focusing on your investment portfolio, a wealth manager will take all the other facets of your financial life into account.

The benefit of wealth management, among other things, is that wealth managers consider and advise on other parts of your finances, and those parts can be just as crucial as your investments.

“When clients come in and they’ve really had their financial dreams broken, it usually wasn’t because they messed up on investments,” said Robert DeHollander, a financial planner in Greenville, S.C. “It was usually because they missed something on the financial defense side, especially insurance.”

A wealth manager may also help coordinate planning with all the financial professionals in your life, such as your accountant, insurance agent and estate attorney. “Most of the time, what we find is that none of those advisors are actually talking to each other, and things can get missed,” Scotto said. “There’s so much more value the client can have if all the advisors are aligned.”

What services does wealth management offer?

Wealth management will differ from firm to firm, but in general, you can expect to find many of the following on a wealth manager’s list:

  • Analysis of cash flow and debt management
  • Tax planning
  • Retirement planning and goal setting
  • Social Security analysis
  • Estate planning
  • Legacy planning
  • Insurance analysis (life, health, property, disability, long-term care)
  • Investment management
  • Coordination of all your advisors (CPA, estate attorney, etc.)

What sort of clients does a wealth manager serve?

Wealth management clients are typically further along in their financial affairs — whether that’s higher on the career ladder or with a higher net worth. They also may be people with more complex financial situations, such as business owners, people approaching retirement or those in the midst of a life event that has money in motion.

“That might be a birth, a death or an inheritance,” DeHollander said. “They need a professional to look over their shoulder and give them advice.”

Wealth management can also be helpful for someone coming out of a divorce or having just lost a spouse. “It’s a very emotional time, and you need somebody to be your advocate to help put everything in place,” Scotto said.

The common thread for wealth management clients is that they’ve realized there’s more to their financial security than their investment portfolio. “Investing assets is a necessary part of creating financial security, but by far, it’s not the sole driver,” said Erika Safran, a financial planner in New York City.

Differences between asset and wealth management

In thinking about asset management vs wealth management, it’s useful to imagine that asset management is one piece of the wealth management pie. While wealth management includes asset management, it also includes guidance on your overall financial picture, from whether you have the right amount of life insurance to whether you have the right powers of attorney drawn up.

In general, either kind of manager can be registered as a broker/dealer or as an investment advisor, and either kind of manager may carry fiduciary responsibility, or they may only need to offer recommendations that are “suitable” for your portfolio.

Another difference tends to be in fee structure: Asset managers commonly charge a percentage of assets to manage your investments, or they’re paid on commission by the products they recommend. Some may also offer an hourly rate.

Wealth managers may charge a percentage of assets, but there may be an additional fee — a flat rate or hourly rate — for the evaluation of your financial picture and for recommendations. This may be a fee that’s charged once, or annually, or every time you have them revisit your situation.

 Asset managementWealth management
DescriptionCovers your investment portfolios onlyEncompasses all aspects of your financial life
FocusInvestments, risk assessment, portfolio strategy, asset allocation and distributionInvestments, insurance, estate planning, retirement planning, education planning, legacy planning, charitable giving, tax planning
CompensationUsually a percentage of the assets under management or commissions from the financial products they include in client portfolios, although some are fee-basedMight be a percentage of assets under management and/or a flat or hourly fee for wealth management services charged annually or as needed

The tricky part about differentiating asset management from wealth management is that a lot of firms use wealth management language to describe their asset management functions. Many “wealth managers” are really just asset managers.

“My experience has typically been that you can’t put a blanket statement on these terminologies,” Scotto said. “I’ve seen people who work at banks who call themselves wealth managers. It’s very confusing to the end investor.”

Which is right for you?

The decision to go for asset management versus wealth management is a personal one and depends on your goals and circumstances. If you’re a newer investor and just looking for a kickstart to get your portfolio going, an asset manager may be the right call. If you’re looking for more overall guidance or you have a more complex money situation, a wealth manager can help.

How to choose a wealth manager

It’s important to put some time and research into choosing a wealth manager because that person will be advising you on every aspect of your financial life. “At the end of the day, you need to feel really comfortable with the person you’re working with because ultimately, one of the roles of the advisor is keeping the client from making costly mistakes,” Scotto said. “You have to have so much trust in your advisor.”

To that end, ask friends and co-workers if they’ve worked with an advisor they recommend. “The best way to do it is through a referral, if you know someone you trust who’s had an experience and can give you the name of somebody,” DeHollander said. Talk to at least three advisors before committing. Ask a lot of questions, and make sure it’s a good fit.

Some questions to ask:

  • How do you define wealth management?
  • Who are your typical clients?
  • How are you compensated?
  • Is any of your compensation based on selling products?
  • What is your money philosophy?
  • What licenses do you hold?
  • What financial planning designations or certifications do you hold?
  • What are your areas of specialization?
  • Will I work with you, or someone else in your company?
  • What kind of services can I expect?
  • Are you required to act as a fiduciary?

(This last question is important. As a fiduciary, an advisor is required to put a client’s interests above their own.)

How to choose an asset manager

The process of choosing an asset manager is a lot like choosing a wealth manager, except your range of focus is narrower. As with a wealth manager, it’s still recommended that you speak to at least three advisors before choosing one, and references are a great place to start. You can ask the same questions of asset managers as you would of wealth managers. (But ask them how they’d define asset management.)

Do RIAs offer asset management services or wealth management?

Registered investment advisors (RIAs) may offer both asset management services and wealth management services. It’s important to talk to them about the services they offer so that you understand the scope of their work.

“It’s a case by case basis, firm by firm, advisor by advisor,” Scotto said. “The one thing to point out is that RIAs, as independent firms, are required to uphold fiduciary standards, and if you’re a Certified Financial Professional (CFP), you’re also supposed to uphold the fiduciary standard of care. If there’s any doubt, find an independent investment advisory firm with CFPs on staff, and you’ll be in good shape.”

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Should I Open an IRA with My Bank?

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

Opening an individual retirement account (IRA) with a credit union or a bank might be a good call, depending on your risk tolerance and investing goals. If you’re an extremely conservative investor, you’re very close to retirement or already retired, a bank IRA might be right for you. But for most retirement savers, the optimal place to invest is a brokerage IRA.

When should I open an IRA with my bank?

For most people, bank individual retirement accounts are not the best place to grow their retirement funds. Bank IRAs offer very limited, low-yield investment options, typically savings accounts or certificates of deposit (CDs). However, they do offer a few advantages for some retirement savers.

Bank IRAs are ultra-safe investments. If you open one at a Federal Deposit Insurance Corporation (FDIC)-accredited institution, the funds you save in an IRA savings account or IRA CD receive deposit insurance up to the legal limit. Even if the bank were to fail, you wouldn’t lose the funds saved in your IRA. This is the right place to park your retirement cash if you’re super risk-averse.

There are tax strategies you can take advantage of with a bank IRA. If your tax preparer tells you on April 14 that you need to make an IRA contribution to get the most out of your tax return and you have money in your bank savings account, you can open an IRA savings account at that bank and move funds into the IRA in no time.

Keep in mind that bank IRA savings accounts and CDs traditionally offer very low rates of return. Most investors need a higher return on their retirement savings to meet their goals. The best place to get those higher returns is to open an IRA at a brokerage.

Should I open a bank IRA savings account?

A bank IRA savings account offers you a tax-advantaged way to save for retirement by stashing cash in a savings account in either a traditional IRA or Roth IRA. With a traditional IRA, your contributions may be tax deductible, and you’ll be taxed on all withdrawals. With a Roth IRA, your deductions are post-tax, and your withdrawals — including earnings — are tax free.

You may also be able to open other types of IRAs at a bank or credit union, such as a SEP IRA or SIMPLE IRA, which are accounts for self-employed people. And in some cases, you may be able to open a Coverdell Education Savings Account (formerly known as an Education IRA).

An IRA savings account pays interest, and the money accrues until you can withdraw it at age 59 1/2 or older. That said, interest rates are typically lower than the returns you could get in the stock market.

Top bank IRA savings account rates

Account

Minimum opening deposit

APY

Latino Community Credit Union IRA Share Account (Traditional, Roth, SEP)

$25

3.05%

Communitywide FCU IRA

$2,000

2.00%

Signature Federal Credit Union IRA Savings (Traditional, Roth, CESA)

$0

2.00%

“We are in a period of low interest rates, and the outlook of those rates going up doesn’t look favorable,” said Thomas Rindahl, a certified financial planner in Tempe, Ariz. “Someone using savings or traditional CDs is facing the very real risk of losing purchasing power over time.”

If you’re a customer at that bank, opening an account may be as easy as logging in online, checking a few boxes and funding the account with a deposit from your bank account. If you’re not a bank customer, you may need to enter your personal information, choose an account and set up a funding deposit.

Should I open a bank IRA CD?

A bank IRA certificate of deposit offers another tax-advantaged retirement savings vehicle — but with slightly higher interest rates, because you agree to keep your cash in the certificate of deposit for the length of the CD’s term, whether that’s six months, one year or five years. Generally, the longer the term, the higher the interest rate.

As with IRA savings accounts, you can open various types of IRA CDs, including a traditional IRA, Roth IRA, or SEP or SIMPLE IRA.

If you’re a bank customer, opening an account may require logging in, confirming your information and funding the account with a deposit from your bank account. If you’re not a bank customer, you may have to enter your personal information, choose an account type and set up a deposit from your bank.

Top bank IRA CD account rates

Institution

Term

APY

BethPage FCU

3 months

1.60%

INOVA FCU

6 months

1.75%

Paramount Bank

12 months

2.25%

INOVA FCU

18 months

2.00%

MAC Federal Credit Union

2 years

2.80%

America’s Credit Union

3 years

2.53%

Credit Union of the Rockies

4 years

2.60%

American 1 Credit Union

5 years

2.78%

Evansville Teachers FCU

6+ years

2.25%

Most retirement savers should open an IRA with a broker

Although bank IRAs offer a safe place to put your retirement cash, they’re not the ideal savings vehicle for most investors. Because you’re investing your retirement cash for the long-term — and hoping to eventually have enough to comfortably stop working — you need higher returns than you’ll get at a bank. This is why you probably want to open an IRA at a brokerage.

“I think of the bank as the place where you have your emergency funds — and I don’t particularly care about low returns on emergency funds, but the IRA is meant to be a long-term investment,” said Chip Simon, a certified financial planner in Poughkeepsie, N.Y. “You probably want to have something that’s going to be steered toward some growth over time.”

For this, you’ll need a brokerage IRA, where you have a much wider array of investments and greater potential to grow your savings. You can build a diversified portfolio from a mix of stocks, bonds, mutual funds, ETFs and other investment vehicles, giving you the opportunity to earn a healthy return and fatten your nest egg over time.

Brokerage IRAs offer higher returns

Consider that since 1928, the S&P 500 has had an average annual return of 11.57%. Historically, non-savings account assets have performed more favorably than savings accounts over the last 15 years:

  • U.S. large-cap stocks: 8.22%
  • U.S. mid-cap stocks: 8.09%
  • U.S. small-cap stocks: 7.93%
  • Long-term bonds: 6.38%

Here’s how it breaks down:

If a 35-year-old deposited $1,000 into an IRA and added $1,000 each year until age 65, here’s how the two accounts would compare:

Account

Assumed annual return

Balance at age 65

Bank IRA savings account

2.00%

$48,163

Well-diversified stock portfolio in a brokerage IRA

7.00%

$112,019

Still feeling ultra conservative? Brokerage IRAs also have conservative investment options, such as bonds and money market funds.

“Oftentimes, what we find is that we can find a better money market than what our client is earning at the bank,” said Monica Dwyer, a certified financial planner in West Chester, Ohio.

Brokerage accounts have the advantage of being a good place to consolidate your savings over time. If you have a 401(k) from an old job, for instance, you can open a rollover IRA at the same brokerage where you have your Roth or traditional IRA (or both), a taxable account and/or a health savings account. Plus, brokerage accounts offer SIPC insurance on up to $500,000, often with secondary insurance on amounts above that.

Brokerage accounts are also easy to roll IRAs into and out of, versus a bank IRA. At a bank, the process can be more cumbersome, and the easiest way is often to take a direct withdrawal.

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.