Investors are usually unaware of the fees they pay for their investments.
Fund managers used to put these fees in the fine print which are easy to overlook. In fact, it is not a surprise that some of them still do it!
As more investors become aware of the multitude of fees they have to pay, from commissions to expense ratios, they naturally ask: How can I manage these extra fees?
Below are some tips that can help you reduce these administrative costs that may be eating away your returns!
Go for a Less Actively Managed Account
The more active management goes into your investment account, the more you naturally have to pay.
Your average actively managed fund costs you about 1.2% in management fees, for instance, whereas its exchange-traded equivalent costs a mere 0.44%.
That’s why carefully choosing investment funds or brokerage accounts can help you reduce costs.
For this sort of arrangement, a better option would be to look for exchange-traded funds, index funds, or even bond funds.
However, if you really have to go with something that’s actively managed, try to find an option that keeps the expense ratio low, or else you’ll end up paying through the nose for fees yearly.
To further emphasise the value of low expense ratios, here’s Pew’s 2018 visualisation of their effects on retirement savings over time.
It compares the journey of two investors earning $60,000 and investing $175 of it each fortnight, starting from their 20s. Investor A invests in a fund that charges 2.05% and Investor B in a fund that charges 0.05%. After 40 years, Investor B had more than $300,000 more in retirement funds than Investor A.
Choose a No-Commission Brokerage
This tip is pretty self-explanatory in the sense that if you go with a zero-commission brokerage, you pay less money per trade, sale, or purchase.
Fortunately for investors, the number of brokerages turning into commission-free ones is increasing. This is a win especially for beginner investors with limited capital.
The industry is highly competitive nowadays, so before selecting and committing to a brokerage firm, you should research and compare it with other options. That way, you may be able to find a good brokerage for your needs without having to deal with hefty commissions.
Pick No-Load Funds
Loads are typically associated with mutual funds. To understand what a load is, just remind yourself that the people who manage this type of funds have included them to make money.
The load mutual fund is basically a commission that goes to whomever is selling the fund. It could be a front-end load or a back-end load: the former just means that the commission is charged on purchase, and the latter means that it’s charged on sale.
You should therefore search for funds that have no load or as low a load as possible.
Of course, if you have definite plans for your fund investments, this may be a debatable point.
For instance, a fair number of investors buy Class B mutual funds for long-term investment. In these cases, loads might not be as much of an issue, because these typically have back-end sales loads that decrease or even disappear over time.
Get Help from a Financial Advisor
There are financial advisors who specialise in guiding clients through smart investments.
Sometimes, this is precisely what you need to help you find the best ways to cut down the total cost of investment fees.
Getting financial advisors' help will especially benefit those who seek wealth over a long period of time. They will help recommend specific investments that you might have never considered or provide a comprehensive investment management.
If you are a beginner in investing, you must understand that in order to truly achieve your financial goals, you will need to spend an ample amount of time researching or speaking with experts. Otherwise, you will risk taking on an investment without understanding the corresponding risk, and could end up losing a large sum of money.
Here at Financial Fortress, we have a team of highly trained experts whose ultimate objective is to help you succeed in your financial goals, short-term or long-term.
If you want to find out how we can help you in your investment management, contact us today.
Written in collaboration with our financial advisory partners at Virtus Associates.