Surprise: You’re probably paying a lot more in investment fees than you think

Here are some shocking statistics from a recent report by the Financial Industry Regulatory Authority’s (FINRA) Investor Education Foundation:

• 21% of investors don’t think they pay any kind of investment commission.
• 17% say they don’t know how much they pay.
• 38% of mutual fund investors believe they pay no mutual fund fees or expenses.

Wow This is very concerning — because most investors pay fees of various kinds and they can be considerable, sometimes even significantly reducing the return on investment.

Image source: Getty Images.

Why taxes matter

The table below shows what difference taxes can make. It assumes two investments with average annual gains of 10% over certain long periods, with one investment charging 0.10% annually and the other 1.00% annually — dropping annual earnings to 9.9% and 9%, respectively :

Data source: author.

Clearly, fees can take a huge bite out of investment results. Here’s a very clear example, modeling hedge fund fees, which can be exceptionally high, from the folks at Dividend Growth Investor: “If you invested $1,000 in Berkshire Hathaway in 1965, by 2009 your investment would have been worth $4.3 million. If Buffett had set up Berkshire as a hedge fund and charged an annual fee of 2% plus 20% of any earnings, the investor would have been left with just $300,000.”

“The average investor pays about 1.5 percent to 2 percent annually,” according to Stuart Boxenbaum, president of Statewide Financial Group, who also notes that with a portfolio valued at $300,000, someone paying 1.5 % pay over $4,500 annually, or $375 each. month. You have!

Meanwhile, the Securities and Exchange Commission (SEC) itself has pointed out that if you start with a portfolio valued at $100,000 and it grows at an average of 4% annually over 20 years, while paying 0.50% per year, you’ll end up with $10,000 less than someone in the same situation paying just 0.25%.

What taxes do you pay?

Here is a large (but not completely comprehensive) list of fees and expenses that investors often pay. You probably pay some of them and others you may or may not pay:

• Transaction fees: Many good brokerages these days charge $0 per trade, but not too long ago many charged $10 or even $25 per trade. If your broker charges you for trading and you trade frequently enough, it may be worth switching brokerages.
• Expense rates: An expense rate is an annual fee charged by mutual funds and exchange-traded funds (ETFs). It’s hard to avoid paying this fee when investing in mutual funds, but you may still favor funds with low fees. The average expense ratio for stock funds was recently 0.42%, while you can find solid passively invested index funds (such as S&P 500 index funds) that charge less than 0.05%). However, some funds charge 1% or more, and the table above shows what this can do to your returns. (Note that a 0.42% fee would cost you $43 per $10,000 invested — annual.
• Loading fees: When a fund charges a load fee, you know you’re essentially paying a sales commission — and those commissions have sometimes approached or exceeded 5%! Fortunately, there are plenty of solid no-load funds these days, so it’s smart to favor them.
• Investment Management/Advisory Fees: If you have a financial professional manage some of your money, there’s a good chance you’ll be charged for each transaction they orchestrate, or you’ll be paid an overall “wrapper fee” — which is a percentage of the account’s value. Packing charges are generally between 1% and 3%. If you’re paying, say, 2% on a $500,000 account, you’re looking at over $10,000 annually! The service you get better is worth it.
• Exit fees: Some types of investments, such as certificates of deposit (CDs), insurance policies, and annuities, charge you fees when you exit the investment, and if you exit early, the fees may be higher. Make sure you understand the fees before signing up for any investment.

What to do

Smart investors should always do some research to find out exactly what taxes they are paying. From time to time, take inventory of your investments and see what they are charging you. Chances are you’ll find fees charged by your mutual funds, retirement accounts, and even your cryptocurrency investments, among many other investments.

To minimize fees, you might prefer simple, low-fee index funds and mutual fund companies known for low fees. Sticking with a good brokerage that charges little or nothing per trade can also save you a lot of money.