Business Briefs 14 Smart Ventures 16
THIS WAY FORWARD
YOUR WEALTH
The Impact of Fees on Your Portfolio
>>>Understanding the costs can help you in the long term.
By Don Humphreys
One of the most important issues
for investors to understand is how fees
affect their bottom line. As investors,
it’s essential that we understand what
these fees are and where they come
from in order to make informed invest-
ment decisions.
Investment fees come in a variety
of forms, but in general, they fall into
two categories: transaction-based fees
and ongoing fees. Transactional fees
are one-time costs, typically associ-
ated with commissions, sales charges,
mutual fund loads (front-end/back-
end), redemption fees or surrender
charges. These costs are generally
paid directly to a broker or sales per-
son at the time of a transaction (buy or
sell.) Ongoing fees are more difficult to
ascertain. Usually, they fall into the fol-
lowing categories: ratios, performance
fees, advisory fees and annual fees.
To be sure, every product you invest in
charges some form of fee that either
directly or indirectly affects your return.
18 May 2009
� Your Wealth 18 Small Business Solutions 20
By looking at specific investment
products, you get a clearer picture of
what all these fees can mean to you.
Stocks and ETFs (exchange-traded
funds) are easy to understand. You
buy or sell, and you get charged a
commission. Slightly more complex
are mutual funds. These can carry
multiple fees. Some funds have sales
charges such as front-end loads or
redemption fees that are similar to
commissions – you pay up-front or at
the time of sale, to a broker or sales
rep. Additionally, all funds charge fees
for the operation of the fund; these are
>Even a seemingly small
1 percent difference in
expenses per year can have
big impact on your overall
investment return.
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called expense ratios. These expenses
are taken out of the fund’s assets and
lower the return to a fund’s investor.
Actively-managed mutual funds gener-
ally carry an expense ratio of 1 percent
to 1.5 percent per year, while index
funds have ratios of around 0.2 per-
cent. Hedge funds typically charge a
2 percent management fee every year
and managers also take a performance
fee of 20 percent of the return gener-
ated. Insurance products such as vari-
able annuities carry multiple layers of
fees. There are broker commissions to
buy them, surrender charges and tax
penalties if you want out early, ongoing
annual management fees, and the vari-
able annuity usually invests in mutual
funds that carry all the fees mentioned
above. Lastly, many independent advi-
sors charge an annual management
fee.
So what does all this mean? Each
product mentioned above has benefits,
but these benefits must be weighed
against their cost. Even a seemingly
small 1 percent difference in expenses
per year can have a big impact on your
overall investment return. By under-
standing the underlying fees involved
with investing, people can make
better decisions about where to put
their money. And these decisions can
clearly have a huge impact. So don’t
be afraid to ask your advisor or broker
for the full scope of fees involved in
your investment process, whether they
are up-front costs, on-going fees or
charges and penalties for selling. NJB
About the Author
Donald Humphreys is the founder of
Voyager Wealth Management, a fee-only
independent registered investment ad-
visory rm headquartered in Harrington
Park.