Disclosure: This article is written for entertainment purposes only and should not be construed as financial or any other type of professional advice.
I was pretty excited to hear about $0 stock commissions. First came Webull with its zero commissions on real-time trades. Then the big names, E*Trade, Fidelity, Schwab, and TD Ameritrade, followed, more quickly than I anticipated. Now Vanguard has announced its free trades.
Many of these firms already offered great deals. They had commission-free ETFs and no-load, no-transaction-fee mutual funds with low expense ratios. Still, the free trades changed everything for me. I could now buy fewer shares more frequently and enjoy putting all of my money to work, not just most of my money less commissions.
But just because stock and ETF trades are free doesn’t mean all investing is fee-free. Here are a few fees to keep in mind when you’re investing.
Account Advisory Fees
Managed portfolios and robo-advisors charge a percentage of assets under management (AUM). Typically, this charge is expressed in terms of an annual percentage, such as 0.20%, 0.35%, or 1.25% of the account balance. The annual fee is then billed quarterly based on the end-of-quarter account balance. So you may see four account fees deducted from your account over the course of one year.
To get an idea of the dollar amount of these fees, multiply your account balance by the percentage. So if you have $150,000 in an account with a 0.35% AUM fee, then you’ll pay $525 each year or about $130 each quarter. Your account balance tends to fluctuate so the management fee changes also, rising as your account grows in value and decreasing if the balance declines.
What types of accounts carry these fees? Here are some of them:
- E*Trade Managed Portfolios
- Fidelity Managed Accounts
- Schwab Managed Portfolios
- Vanguard Managed Assets
Note that you’ll generally pay higher fees as a percentage of assets if you choose financial planning services in addition to the standard portfolio design and account management services.
Speaking of managed assets and managed portfolios, these are typically comprised of ETFs and sometimes mutual funds, which carry fees embedded into their returns.
Further, even if you just bought ETFs and/or mutual funds, you’d still pay these fees indirectly. These fees are expressed in terms of expense ratios. You might think that these costs are negligible and worth the cost, especially when they help you create a diversified portfolio fairly easily. In many cases, you’d be right. For example, Vanguard ETFs have expense ratios that are as low as 0.07% and Schwab boasts ratios of 0.05% for passively managed funds.
But some funds cost much more. Some may have expense ratios of greater than 0.50% or even over 3.00%.
If you invest $5,000 in an ETF or mutual fund, $2.50 per year will cover fund expenses when the ratio is 0.05% and $150 when the ratio is 3%. So, even though you’re not paying these fees out of pocket, it makes sense to pay attention to the fees before buying.
Short-Term Trading Fees
While selling stocks within a few hours or days of buying them won’t run up a bill, the same isn’t true for some mutual funds. Often, there is a penalty fee, often called an early redemption fee or short-term trading fee, on certain mutual funds that you sell within a certain time frame after your purchase.
Generally, these fees apply to no-transaction-fee mutual funds, which you can buy without paying a trading or transaction fee. But if you don’t hold the mutual funds for long, say less than 90 days, you may be charged a fee. For example, Vanguard charges $50 when you redeem (sell) shares of no-transaction-fee mutual funds within 60 days of buying shares. This fee serves as a deterrent to short-term mindset as related to mutual funds.
So be aware of fees you may incur if you apply the stock trading logic of short-term holdings to mutual funds.
Sales Fees on Mutual Funds
Mutual funds may also carry sales fees aka loads. These may be charged when shares are purchased or when they are sold, or some combination of this scheme. Front-end loads are fees you pay when you buy shares; back-end loads or deferred charges are fees you pay when you sell or redeem your shares. The fees may range from 1% to 8%.
So, if you invested $10,000 in a mutual fund with a front-end load of 4%, then you’d pay $400 in sales charges. If you invested the same amount in a mutual fund that grew to $20,000 in value within 5 years with a 4% back-end load, you’d pay $800 in fees.
You may also pay a transaction fee for buying or selling certain mutual funds.
Phone-Based Trade Commissions
If you conduct your stock trades online, you can avoid getting charged for trades requested by phone. But you should be aware that these fees exist as you could encounter a temporary problem with an online platform at some point in your investing life. Fees range from $5 for automated phone trades to $25 or more for broker-assisted transactions.
Other Random Fees
Certain firms, like Vanguard and Wells Fargo, charge annual account fees. Generally, these can be waived if you sign up for electronic communications.
To learn what fees you may incur while investing, check out the pricing page of your brokerage firm or investment advisor. For example, Schwab lists its fees on its pricing page and Betterment explains its fees on its pricing page.
What investing fees have surprised you?