Wes Moss: 7 fees that can kill your investment performance

Wes_Moss-for-Web-smaller-fiCertified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest blog will appear here every Monday.

The Seven Layer Dip of Fees

As an investor, you sometimes need to remember the Serenity Prayer – “God, grant me the serenity to accept the things I cannot change; courage to change the things I can; and wisdom to know the difference.”  There are many facets of investing that are beyond our control.  Fortunately, we can do something about investment fees.  And that’s good, because fees can seriously hinder your rate of return.  As you build and tweak your portfolio, keep an eye out for what I call the Seven Layer Dip of Fees.

1. Mutual fund fees

There are plenty of good mutual funds that don’t charge large fees. Your investment advisor should offer you a way to have access to “no-load” (funds that do not have an upfront or backend fee) or institutional share classes. No load funds have no barriers to entry or exit, and institutional share classes generally have much lower annual fees.

2. Mutual fund surrender penalties

Surrender penalties are a tricky way for a mutual fund company to force you to leave your money in their fund to avoid paying a hefty fee to get the money out. Penalty fee periods can be as long as eight years or more and cost as much as 8% of the value of your investment! Avoid these mutual funds like the plague!

3. Brokerage trading commissions

The days of paying a few hundred dollars to execute a securities trade are over. You can open an online brokerage account and make a trade for less than $15.  Independent advisors can trade on behalf of their clients for as little as $8 a trade.  Charles Schwab, TD Ameritrade, and Fidelity are great places to start.

4. Internal mutual fund operating costs

Mutual Fund managers make their living off the fund’s Expense Ratio. The charges vary greatly from fund to fund.  High priced, “actively” managed funds, that seek to outperform the market (and rarely do), are in the 1 to 1.5% range.  Index funds that attempt to “passively” track the return of the market require much fewer people and research to run (and actually outperform the majority of “active funds”).  They also have much lower fees, in the .07% to 0.50% range.

5. Wrap management fees

In an effort to appear more fee conscious, many big firms offer “fee based” accounts. This is an attempt to mitigate brokerage costs associated with the big firms. But be wary – the management fee (generally a percentage of assets under management)  goes to the broker and is layered on top of mutual fund fees and account fees charged by many of the big banks/brokerage firms. At the end of the day, you can still end up with an investment cost of more than 2% – on what is supposed to be a fee conscious investment account.

6. Mark ups on bonds and new issue securities

Advisors at big bank/brokerage firms have the ability to sell you individual bonds and stocks from their firm’s inventory. The dirty little secret: advisors are allowed to “mark-up” the price of the bond or other security when they buy it for you and keep the difference. This can be a hard fee to quantify as the commission is often built into the price of the security. To add to the pain, brokers can also “mark-up” the price when they sell  the security for you – a double whammy of fees!

7. 12b-1 fees

Known as 12b-1 fees, these are marketing fees that mutual fund companies give back to advisors and firms that put their clients in the fund. There is a lot of debate right now about how 12b-1 fees should be disclosed and whether or not they are appropriate; just be aware that this is a sneaky layer in the dip of fees.

Now, brokerage firms, big banks, mutual funds, and investment firms can’t help you manage your money for FREE…they have to charge for their expertise, counsel, and time.

However, it has been proven that one of the biggest killers of investment performance over time is paying excessive fees.  So ask your advisor, or broker, exactly how they are getting paid, and all the ways that you are paying for their service.  The less layers of dip you have to work through, the more money you will have left over in retirement.

Follow me on Twitter @atlbargains and on Facebook at AJC Atlanta Bargain Hunter

9 comments Add your comment

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October 11th, 2010
8:53 am

This is why I just buy strong, US, dividend-paying stocks for less than $10 per trade. No fees associated with these and a 20-year bet on the success of P&G, J&J and Coke seem to be a no-brainer to me!


October 11th, 2010
8:54 am

Oh yeah, and a 3%+ dividend when CDs are paying less than 1% is a pretty good deal….


October 11th, 2010
9:42 am

I wouldn’t mind paying some of those fees if my broker would atleast make me SOME money…


October 11th, 2010
10:06 am

The rich get richer. I hate to admit it, but some of them are actually worth the higher fees. But as long as we’re buying and selling they’re happy…and wealthy.

Wes Moss

October 11th, 2010
12:34 pm

The most important issue here is to understand your fees, and make sure that you comfortable and informed about costs!
This also goes along with working with someone that you trust, feel comfortable working with, and who has YOUR best interest at heart.
Next week I’m going to be talking about various ways to either PAY for advice, or invest on your own…


October 11th, 2010
2:12 pm

So Wes-
You are an advisor at a major brokerage outfit. Why don’t you tell us how YOU GET COMPENSATED? And are your services geared to the small timers out there – or are you interested – and make money – off the large/wealthy individuals?


October 11th, 2010
3:09 pm

Heck, most of us are just trying to protect principle.

Peggy McGillin, CFP

October 12th, 2010
12:38 pm

Wes Moss’s article is a great educational resource. I believe that client’s are happy to pay a fair price for quality services. Ask your broker about the bonus structure too or what doesn’t get included in their “fee-only” assets, if they don’t get paid on index funds or etfs, do you think you will see these low cost portfolio work horses in your portfolio? This scrutiny and knowing the right questions to ask is all true for individuals and for company 401k plans. Ask your advisor if they are a fiduciary, how they get paid and how they don’t get paid and get it in writing. Ask them if anyone other than you pays them for anything. You want their business model to be in alignment with your interests and as objective as possible by any standard. http://www.blog.journeyfinancialplanners.com