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When I invest in stocks, mutual funds, or ETFs, I may pay fees relating to these investments. Fees tend to fall in these two categories: ongoing charges relating to the management or maintenance of my account; and transaction-based expenses relating to specific activities, such as the purchase and redemption of shares.
What's tricky about investment fees is that some are more transparent than others. Some charges are embedded in the investment product (such as management expenses of mutual funds) while others are standalone expenses such as maintenance charges.
Here are typical fees to investigate when signing up with a brokerage firm and investing money:
Account maintenance, service, and inactivity fees
Most brokerage firms do not charge account maintenance fees. But it makes sense to check fee schedules. Occasionally, there are different charges that apply depending on an account's purpose, whether for wealth building, retirement, or college savings.
For example, at Vanguard, there is a $20 annual account service fee for brokerage accounts or mutual funds with a balance of less than $10,000. This charge can be avoided if I sign up for paperless delivery of statements and communications. A broker may charge an inactivity fee for low-balance accounts with no transactions during a certain time frame.
These fees can often be avoided, but I need to know about them in order to take proper actions.
Stock trading fees
When I buy or sell shares of stocks, I typically pay a transaction fee. These costs may start at $4.95 for online trades and rise to $44.99 for broker-assisted trades at online brokerage firms.
Here are some sample prices:
- Online trade: $4.95 at Schwab, $4.95 at Fidelity, and $6.95 at TD Ameritrade
- Interactive voice response (IVR) phone system trade: $34.99 at TD Ameritrade
- Broker-assisted trade: Upcharge of $25 at Schwab; or flat fee of $32.95 at Fidelity and $44.99 at TD Ameritrade
It's difficult to avoid trading fees but I may be able to get a certain number of trading fees waived, particularly by taking advantage of promotional deals when transferring account balances from one brokerage firm to another. Also, I can buy and sell a limited number of stocks without paying a commission at Loyal3's new platform on FolioFirst– but I'll need to pay a monthly fee of $5 for this service (see my review).
ETF trading fees
Typically, the fees to trade ETFs are the same as stock trading fees at an online brokerage firm, ranging from $4.95 for regular online transactions to $44.99 for ones involving a broker's assistance. However, I may be able to buy and sell certain ETFs without paying a trading fee, if I buy commission-free ETFs.
Check each broker's website to find a list of its commission-free ETFs.
Sales loads (aka sales charges) on mutual funds
Sales loads are added to mutual funds to provide a commission to the sales representative. These charges can be as high as 8.5% of your investment. According to the Securities and Exchange Commission, these charges may include:
- Front-end load aka sales load or sales charge on purchases, deducted from the initial investment immediately (Class A shares)
- Deferred sales charge aka deferred sales load or back-end load, charged when I sell or redeem fund shares (Class B Shares)
- Contingent deferred sales load (CDSL), also charged when I sell shares but the percentage charged declines each year I own the shares (also Class B shares)
- Level loads of up to 1%, charged through 12b-1 fees every year I own the fund (Class C shares)
I can buy no-load funds to avoid these fees.
Mutual fund transaction-based fees (paid to the fund company)
I may pay fees to the fund company, rather than a broker or sales representative. These charges may include:
- Redemption fees for redeeming (or selling) shares
- Exchange fees for exchanging a fund for another within a fund group
- Purchase fees paid to defray costs of processing share purchases
Review each fund's prospectus and look at fund company pricing to understand what fees may be charged.
Mutual fund trading fees (broker commissions)
Many no-load mutual funds carry broker commission charges whenever I purchase or redeem shares. These fees can be steep and are priced very differently at various brokerage firms. For example, I'll may pay $19.99 at E*Trade, and $49.99 at Fidelity and TD Ameritrade for trades on transaction-fee funds. Schwab charges $76 for purchases and $0 for redemptions. Fidelity offers broker-assisted trades but these can cost as much as $250.
Brokerage firms that have a large roster of no-transaction-fee, no-load mutual funds tend to have steeper trading costs on no-load mutual funds. To minimize costs associated with buying funds from a broker, I can look for no-transaction-fee, no-load funds or buy directly from the fund company if possible.
Mutual fund and ETF operating expenses
Fund companies incur costs to manage the investments in their funds; market and sell fund shares; and handle administrative duties. These expenses are paid out of the fund assets and reduce annual returns. To see these charges (expressed as a percentage), view the operating expense ratios on fund profiles.
Early redemption fees
Certain mutual funds and ETFs carry short-term or early-redemption fees if I sell a fund soon after buying shares. The number of days that constitutes short term can vary from 30 to 365 days. Often, these fees are charged on funds that otherwise carry no commissions, such as no-load, no-transaction-fee mutual funds and commission-free ETFs. Fees may range from $7.95 for ETFs at Fidelity to $49.99 for mutual funds at TD Ameritrade. The price may also be calculated as a percentage; you may owe 2% of share prices for selling a Schwab fund early.
Avoid these fees by holding funds for the long-term or buying funds without early-redemption fees.
Account closing and/or transfer fees
Many investment firms charge to close an account and/or transfer investments to a new brokerage firm. Such a fee may not be top of mind when opening an account but it's one to consider before signing up.
These fees tend to be about $50-75 but may be as high as $95 at WellsTrade.
They may be hard to avoid. But incentives at the new brokerage firm may help defray exit costs from an old firm.
Portfolio management fees
Investment advisers who manage a investment portfolio typically charge a percentage of the assets under management. This number can be as low as free at Wealthfront on balances of less than $10,000; range from .20% to 1.35% at Schwab; and go to 2.0+% at more traditional practices involving frequent face-to-face contact.
I can avoid these fees by managing a portfolio on my own.
Figuring out ways to avoid excessive expenses can improve results. Investment returns are variable but expenses are due whether I make money on my investments or not.
There are times when expenses involve trade-offs. For example, I may avoid certain fees on mutual funds but get dinged for other expenses; or I might pay a fee comprised of the percentage of assets under management but avoid transaction charges for ETF trades.
I've learned that shouldn't try to avoid all fees at all costs. But, I like being aware of what fees I'm paying so I can make an informed decision on how to build and manage my investment portfolio at the lowest cost possible.
Note that fee structures change frequently so check commission and fee schedules before investing.