Saving enough money for retirement is hard. Its even more difficult when some of your money is taken away by fees that are unseen and possibly unnecessary. Small fees can have a big impact over the long term, and everyone should know what they are paying. All of their options should be available so they can make informed decisions. Individuals are likely unaware of the total cost of fees and expenses. Products in the financial industry have fees that are hidden and fees that are upfront. Mutual Funds, for an example, have fees that are clearly stated but also have other fees that are not declared. The fees are as follows:
Loads: Different kinds of Mutual Funds have different charges. They are like commissions because they compensate the person who sold the fund to you. Some are on the front end and some are on the back end. The payment on the front end is about 5%. The ones on the back end are charged when you sell the Mutual Fund, particularly within a certain period.
Ratios of Expense: Used to pay distribution costs, administrative fees, management fees, and costs of marketing. It can be 1 % or more, depending on the fund. 1.4 % per year is the average expense ratio, according to the Investment Company Institute.
Advisory fees: You might pay a management fee to your fund advisor, which can range anywhere from 0.25 % to 2.5 %. This is required on investor documents so you should know how much this fee costs you.
Some fees are not so clearly stated, so you may not have noticed them, including:
Soft money costs: This comes when Mutual Fund managers get software, educational tools, research or some other service from a brokerage company. For these benefits, the brokerage house gets their business and can charge more commission for trading the stocks in the fund. This price is paid by the investor.
Taxes: You pay tax on each transaction of the Mutual Fund whether you benefit or not. The usual tax cost ratio for Mutual Funds (Stock) is 1 to 1.2% per year, according to a Forbes Magazine article.
Commissions for trading: When something is bought or sold within a Mutual Fund there is a commission charged, and these costs technically do not have to be told to the investor. An article in the Wall Street Journal said a 2009 study of thousands of U.S. Equity Mutual Funds displayed that trading costs investors 1.44 % on average.
If you know what you are paying and the fees attached to the funds, you might be able to lower some of them with a bit of negotiating. Recommended as an alternative are Separately Managed Accounts, which are somewhat similar to Mutual Funds, but can be customized specifically to the particular needs of the investor.The idea is to keep as much money in your pocket as possible and avoid the hidden fees. They can add up and take quite a bit away from your retirement.
