Taking the time to understand fees associated with your investment makes a big difference to your bottom line growth, particularly when considering medium to long-term investment structures.
Advisors worth working with should be willing to explain any fees associated with investment options you are considering. If you don't work with an advisor, you'll still have to pay fees, but you'll have to dig through prospectuses and any other literature yourself to find out exactly what those fees are.
Investors have a right to know what they are paying, and how someone is compensated for recommending a particular investment. Here is a breakdown of the six most common types of investment fees that could be applicable to your next investment:
1. Expense Ratio or Internal Expenses
It costs money to put together a mutual fund. To pay these costs, mutual funds charge operating expenses. The total cost of the fund is expressed as a ratio, so a fund with an expense ratio of .50%, means that for every £1,000 invested, approximately £5 per year will go toward operating expenses.
The expense ratio is not deducted from your account, rather the investment return you receive from the fund is already net of fees. It is important to remember you can't compare expenses in all types of funds equally. Some funds, like international funds, or small-cap funds, will have higher expenses than a large-cap fund or bond fund. So it is probably best to look at expenses in terms of your entire portfolio of mutual funds.
2. Investment Management Fees or Investment Advisory Fees
Investment management fees are charged as a percentage of the total assets managed and are usually deducted quarterly in arrears.
Example: An investment advisor charging 1%p.a means that for every £100,000 invested, you will pay £1,000 per year in advisory fees. If the fee is taken from your account each quarter, it would be £250 per quarter.
Many advisors or brokerage firms charge fees much higher than 1% a year. In some cases, they are also using high-fee mutual funds which means you could be paying total fees of 2% or more. It is typical for smaller accounts to pay higher fees (as much as 1.75%) but if you have a larger portfolio size (£1,000,000+) you are unlikely to pay advisory fees above 1%p.a unless receiving ad-hoc services in addition to investment management. (Such services might include comprehensive financial planning, tax planning, and estate or inheritance planning)
3. Transaction Fees
Many brokerage accounts charge a transaction fee each time an order to buy or sell a fund/stock is placed and can reach over £50 per trade in cases. Some institutions or investment houses may waive this fee completely, or allow a fixed number of initial transactions to be made free of charge. While this can help keep fees down in the short-term, you should still be wary of making regular trades or transactions on small investment amounts, as the fees will add up quickly and detract from investment growth.
4. Front-End Load
In addition to ongoing operating expenses, an "A share" mutual fund may charges a front-end load, or commission.
Example: If you were to buy a fund that has a front-end load of 5%, then you buy shares in a fund at £10.00 per share, but the very next day your shares are only worth £9.50 because .50p per share was charged as a front-end load.
5. Back-End Load or Surrender Charge
Alternatively, "B share" mutual funds charge a back-end load or surrender charge. A back-end load is charged at the time you sell your fund, and usually decreases for each successive year you own the fund.
Example: The fund may charge you a 5% fee if you sell in year one, 4% in year two, 3% in year three etc.
This structure is often more popular with longer-term investors as if you own the product long enough the company recoups its marketing costs over time, thus the decreasing surrender fee.
6. Custodian Fee
Finally, some brokerage accounts may charge annual account fees, which can range from £25 - £90 per year. Some firms will also charge an account closing fee if you terminate the account with fees ranging depending on the provider. If you are working with a financial advisor that charges an AMC these annual account fees may be waived.
Unfortunately, many of the fees mentioned above are either hidden or not fully explained to investors at the outset, and this can lead to lower than expected NET returns and a good deal of frustration for clients.
For more information, please contact me. I will be happy to help with whatever questions you have. www.rgwealthsolutions.com +6011-51565649
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