Do You Know Your Costs?

It’s no surprise that there are costs involved in investing. No one dos anything for free in the investment industry. But, do you know exactly how much you are paying and to who for your investments? If you’re like most investors, you may have a small general idea or no idea at all. Remember that there is only so much juice in an orange and the lower your cost, the more you have leftover in your pocket. Since the majority of investors are involved in some type of mutual fund, we will examine what costs to look out for below. Remember, you can always find all of your cost information in your prospectus or online.

Commissions: Depending on the share class you are in (A, B, C, I, R, etc.) you may have an upfront or deferred sales charge involved. It’s important to view your prospectus to understand if you have a commission involved anytime you buy or sell mutual fund shares. Brokerage commissions can take a large toll on your returns.

Advisory Fees: In non-commissioned accounts, you may have an advisory fee associated with your account. While good advice is worth paying for, it’s important to know what your fees are and that they aren’t above average.

Distribution Fees or 12b1 Fees: Many mutual funds charge you a distribution or 12b1 fee. This is a fee that’s paid to the brokerage firm, your advisor, or someone else for the sale of fund shares. Ever heard of a kickback? In basic terms, this is what this fee is. It’s important to know if you are using a mutual fund that offers this fee to be sold. It’s coming out of your pocket. There are mutual fund companies out there that don’t impose this type of fee and don’t pay for preferential treatment.

Operating Costs: This is a percentage fee that is charged by the mutual fund company itself. This fee can range from zero to over several percent. Again, the less you pay in operating costs, generally the more you keep. Don’t get sucked into the high cost trap of investment companies who claim they can beat the market consistently and have high operating expenses.

Ticket Charges: This fee is charged by you custodian, or the holder of your funds. Many funds require you to pay each time you buy or sell. While this is a necessary cost, it’s important to try and minimize this. Resist over trading or active trading in order to reduce this cost.

Turnover Cost: This is a cost that doesn’t have to be reported by the mutual fund companies that many people don’t know about. But, it can add significant amounts of cost to your portfolio. Turnover is the buying and selling within the mutual fund itself that you don’t see. You can research what your turnover percentage is, but it’s pretty complicated and often you can’t find an exact number. The best thing you can do though is use funds that have a low turnover ratio, thus a lower turnover cost. High turnover funds are generally associated with active management while passively managed funds generally have lower turnover. There are a number of academic studies that aim to put a dollar amount on turnover that Synergy Wealth Management can help you estimate.