When you invest in valuable items, it’s easy to overlook the hidden fees.
Buying a house certainly requires property tax and insurance payments, but you may quickly discover hidden fees in your investment—such as home repair and maintenance costs—of which you were never aware nor did you expect.
Purchasing a car results in a similar scenario, in that taxes and insurance are rarely the only expenses. Repair, cleaning, maintenance, and miscellaneous fees can catch you off guard.
You’ll soon realize that it’s more expensive than you ever thought to manage these assets. The same is true with investment accounts.
At Betterment, we think all investment accounts should be clearly and transparently priced, without any hidden fees.
Now, we can help you discover where you’re paying high advisory or hidden fund fees across all of your investments.
Here’s a deeper dive of the types of fees that you may encounter in your investments with outside fund providers.
Understanding Fund Fees
When investing in any mutual fund or exchange-traded fund (ETF), the investor pays fees that cover the management, administration, and operations of the fund. These fees are summarized in the expense ratio.
This fee may also include marketing costs which go to the salesperson, known as 12b-1 fees. The expense ratio is visible in the fund’s prospectus, but in general people rarely read that long document.
It often goes unnoticed because the fee is not explicitly charged from the balance, but is instead built into the fund’s daily pricing.
According to a Morningstar study, expense ratios were touted as “the most dependable predictor of performance.” But, contrary to general assumptions, paying higher expense ratios does not guarantee higher returns in an investment portfolio.
In fact, the same study showed that funds in the lowest quintile of expense ratios produced the highest total returns, whereas those funds in the most expensive quintile of expense ratios produced returns in the lowest quintile of funds analyzed.
Since paying higher fees does not equal high returns, choosing funds with a lower expense ratios is a simple yet generally sound investment strategy.
If you hire an advisor to choose and manage your investments, including one such as Betterment, you’ll most likely pay for the service received.
This is known as an “advisory fee.” If you pay advisory fees with an outside investment provider, you can enter them after you sync your outside accounts with Betterment. We summarize how much you are paying in fees per year, and also take that number into account when providing retirement advice, provided by RetireGuide.
Some advisors do not charge fees in an overly transparent manner but earn revenues in other ways. This can include the 12b-1 fees mentioned above, which are built into the expense ratio of the fund, or through load charges, explained below.
Aside from expense ratios and advisory fees, some investment funds have even less transparent costs. One reason Betterment chooses ETFs for our portfolio is because they do not contain the fees mentioned below1, and they are tax-efficient.
On the other hand, mutual funds can have additional fees and revenue-sharing relationships, due to the level of trading and activity involved with the fund’s management.
When investing in mutual funds, they typically have the following costs which are borne of the investor, but not included in the expense ratio. These include:
Sales load fee: A sales charge imposed by “Class A” or “Class B” mutual funds when you purchase shares. “Class C” shares can have a load fee when you withdraw your money from the fund. These loads are commissions that pay the professional adviser or broker who sold you the fund, and can go up to 5.75%.
Trading fee: Trading fees when you buy or sell stocks in a brokerage account, or when the manager of a mutual fund pays to make trades within the fund. These expenses are taken out of the daily pricing of the fund, but not included in the expense ratio. These fees are hard to estimate, but in general a fund that has a high turnover, like an actively managed fund, will have higher trading fees.
Redemption fee: Also referred to as a “market-timing fee,” or “short-term trading fee,” mutual funds charge this fee to discourage investors from making short-term “round trip” transactions (i.e., a purchase, typically a transfer, followed by a sale within a short period of time).
4 Steps to Minimize Investment Fees
As a smart investor, there are four steps you can take to help minimize your investment fees.
- Know where you stand. Look up the expense ratios for all of your investments, or simply sync your outside accounts with Betterment to see a summary of the total advisory and fund expenses you are currently paying.
- Choose low cost funds. Typically, index ETFs are cheaper than mutual fund equivalents. They generally have no loads or marketing expenses. They also have lower turnover, which means lower internal trading costs and low taxes.
- Avoid trading costs. If you envision lots of trading activity across your investments, try choosing a platform that has no trading costs. Trading costs can be a constant drag on returns, especially when you use smart strategies like rebalancing and tax loss harvesting. Betterment includes both smart rebalancing and Tax Loss Harvesting+ (TLH+) benefits at no additional cost for customers.
- Select a low cost advisor. If you have investments with other providers, inquire regarding what fees outside of expense ratios are being charged. You can then enter these additional fees to appear on your synced non-Betterment accounts.
Betterment is the largest automated investing service, and we also deliver enhanced value with truly transparent pricing and lower fees than traditional financial services.
When you sync your accounts, not only can you see all of your wealth in one place—we’ll also help you discover which outside investments are charging you high fees so that you can take action accordingly.
1Some brokerages charge trading fees for ETFs. Trading fees are included in Betterment’s flat advisory fee.
More From Betterment:
- 4 Reasons to Sync Your Accounts with Betterment
- How Much are You Losing to Idle Cash?
- Why An ETF Portfolio Serves You Better