It’s fairly typical that most investors focus primarily on investment returns. Certainly, returns are important. Yet many investors fail to look at two other factors that can significantly impact their net return. Investment fees and taxes can take a huge bite out of your earnings. We’ll focus, today, primarily on the various investing fees that reduce your bottom line.

First and foremost are management/advisory fees. Investment advisors typically have three ways of charging for their fees: commissions, fee-based management and hourly or fixed fees.

Most everyone is familiar with commissions. If you sell a stock, you must pay the broker a commission. The commission can vary from a few dollars at a discount broker to substantially more at a full-service broker. Some mutual funds charge commissions (known as loads) either up-front at the time of purchase (Class “A” funds), or when you sell (Class “B” funds). There are numerous other classes with varying fee arrangements too numerous to detail in this post. No-load funds charge no commissions.

Regardless of whether or not mutual funds charge commissions, they all charge management fees. You can check out a fund’s fees or “expense ratio” by visiting the Morningstar™ website. Fees typically vary from a fraction of a percent for a low-cost index fund to 2.0% or more, annually, for a proprietary, actively-managed fund.

Studies have shown that lower-fee funds typically perform better than higher-fee funds.
Obviously, the downside of an advisor being compensated via commissions is that they may be motivated to suggest you buy the higher commission investment. Commissions can also lead to “churning”, where the advisor recommends changes to the client’s portfolio more often than necessary, in order to boost the advisor’s earnings.

Generally considered better than paying commissions, is a fee-based approach, where the investor pays a percentage of the assets managed, on an annual basis. Often, these fees average about 1.0% of the assets managed. In some cases for large portfolios, you might pay less than 1.0%. The advantage to this approach is that the advisor is motivated to grow your assets, and therefore recommend the best investments for you, not an investment that increases his income (due to a commission received). The downside is that your fee continues to grow as your portfolio grows, even though the work required of the advisor is essentially the same. There can also be an incentive for the advisor to focus their energy on gathering new business over servicing their existing business. Lastly, under this approach, you are usually required to move your assets to the advisors’ preferred brokerage house.

Finally, there are advisors who charge by the hour or quote a fixed fee for their services. The advantage here is that the fee does not grow as the portfolio grows ands the advisor’s advice is not influenced by commissions tied to products or to relationships with brokers and dealers. Investors have a clear picture of what their fee will be, which promotes a foundation for trust in the advisor/client relationship. Advisors who sell products will always be subject to the temptation to recommend products based on the potential revenue or influences of their broker dealers. We believe the fixed fee or hourly fee arrangement is the best approach for investors.

The bottom line is that you can improve your investment results, substantially, by paying attention to the fees involved. Many people have no idea what their paying. Take some time to find out. You may be surprised.