The Hidden Costs Of Investing

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The cost of investing can be much higher than many people realize because of all the hidden costs. Unfortunately the investment industry often goes to some lengths to hide these costs from you. There are ways to avoid these costs if you can spot them. Some of the most common hidden costs are:

 

Broker’s Fees

Contrary to popular belief it is impossible for the average person to buy stocks, bonds, commodities and funds directly from an exchange even through an online brokerage. Almost any retail transaction you make will involve a fee. Persons who buy a lot of stocks should be able to some money by going through a discount brokerage but they will not avoid the fee. The best way to avoid these is to visit several online brokerage sites and compare fees. There are some discount brokerages that have fees under $5 for stocks. Another good piece of advice is to conduct all your transactions online, most brokerages charge substantially less for internet purchases.

 

Shareholder Fees

Almost every fund including mutual funds and ETFs will charge some sort of shareholder’s fees. Federal law requires the fund to list these in its prospectus, in the section called “Shareholder Fees.” These fees are usually charged as a percentage of the fund and they can really add up. There are a wide variety of fees charged if you add them up you can get the fund expense ratio which is the real cost to you of owning the fund. Experts recommend that this ratio be less than 1.5% or it will start cutting into your profits. Some examples of shareholder fees include:

 

Sales Loads

Sales loads are essentially a commission that is paid to whoever sells you a fund. This includes financial advisors, brokers, insurance agents and others. Sales loads can be up to 8.5% the value of your purchase. Front loaded sales loads are charged when you make the purchase. Front-loaded funds can be more expensive but they can save you money over the long run.

 

Deferred sales charges or loads are charged to over a period of years. It is often possible to avoid sales loads or reduce them by shopping around. Sometimes you can eliminate them by buying funds directly from the fund company or purchasing through an arrangement such as a deferred annuity. There are also many no load fees out there but they come with charges as well.

 

Transaction Fees

Many funds and annuities charge transaction fees whenever you move money around. Redemption fees are often charged when money is taken out of a fund. Redemption fees can be up to 2% but there is a 10% income tax added to funds taken out of many deferred retirement investments including annuities and IRAs if you are under 59½ years old. Fees can also be charged when you purchase or move funds around.

 

Management Fees

Many investments including mutual funds come with a wide variety of management fees. These are usually charged on annual basis and will be listed in the fee table of the prospectus. Management fees should be around 1%.

 

Turnover Costs

One of the biggest hidden costs investors do not see is the turnover cost. If the managers of a fund are continually buying and selling equities and securities the costs will be higher. These costs will be passed onto investors in one way or another. You can avoid paying turnover costs by refusing to buy funds that are constantly turning over stocks and other equities. Experts recommend that you avoid any fund that has a turnover rate of more than 5%.