Every investor is on the lookout for the next hot stock or mutual fund to invest in. But how many take time to find out all the investment fees that will be associated with their investment? There are various investment fees you will be charged that you need to be aware of. When you approach your financial advisor, make sure that you ask them to explain to you in details all the charges that you will pay when you make an investment. Here are 6 investment fees to take note of before you invest:
1. Expense Ratio or Internal Expenses
Investment managers charge a percentage of your total investment to cater for the expense ratio. In most cases, the total expense ratio of an actively managed fund should fall below 1%. Be wary of those that charge exorbitant fees unless they are delivering extraordinary profits. For example, a fund that has an expense ratio of 0.90% means that if you invest $1000, about $9 will go toward operating expenses per year.
2. Transaction Fees
Most brokerage accounts charge a transaction fee each time you place an order to buy or sell a mutual fund or stock. The fees usually range from $9.95 to $ 50 per trade.
3. Investment Advisory Fees
The investment advisory fees or investment management fees are expressed as a percentage of the total assets the fund managers manage for you and they are paid partially with pre-tax or tax-deductible dollars. For example, if the advisor charges 1% in advisory fees it means that for every $100,000 that you invest, you will pay $1,000 in advisory fees per annum.
4. Front-End Load and Back-End Load
In addition to the operating expenses, you can incur a front-end and a back-end load. A front-end load is a commission or a sales charge on purchases applied at the time of making your initial purchase of an investment such as a mutual fund or an insurance policy. A back-end load is a surrender charge. For example, if you want to buy a fund worth $5,000 that has a front-end load of 5%, it would mean that $250 would go to middlemen and only $4,750 would be invested. Some mutual fund managers say that the front-end load caters for the extra services offered in a load fund.
5. Margin Fees
A number of brokerage firms allow customers to borrow up to 50% of the purchase price of a stock. Online brokers charge a margin interest of up to 9%. Short sellers also incur a margin fee on all open short positions. Some margin fees can change at any time without any prior notice so you need to be alert lest you get caught off guard.
6. Custodial and Inactivity Fees
In most cases, the custodial fees are usually meant to cater for administrative services and upkeep costs. Some investment managers waive the fees or you can opt for an account that does not charge these fees.
Always be on the look-out to uncover any sneaky fees charged on your investment. Make sure you ask before you invest and in case you notice a change in the charges applied, never hesitate to ask for an explanation from your investment advisor.