Many traders are flawed in relation to the charges they pay
Image source: Eric Audras | ONOKY | Getty Images
There seems to be a lack of understanding among investors about some of the fees they pay.
Almost half (47%) of investors mistakenly think that the cost of investing like mutual funds and exchange traded funds in general is included in the fee they pay to their advisor or online investment platform, according to a study by State Street Global Advisors shows. The proportion of consultants is 60%.
“There are other fees in addition to paying an advisor,” said Brie Williams, head of practice management for State Street Global Advisors. “Depending on the investments, some come with fees.”
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The older an investor is, the less likely the cost of mutual funds and ETFs is included in their advisory fee, according to State Street’s study. While 71% of Millennials share this misconception, the numbers are lower for Generation X (51%) and Baby Boomers (36%).
“We encourage all individual investors to take the time to understand what expenses they are paying, whether or not they are in an advisory relationship,” said Williams.
Investment and management fees have been falling for some time, generally due to competition from the emergence of lower-cost options. What you pay for is important because it takes a bite of money that would otherwise be in your account to keep growing. The higher the annual expenses, the more your earnings will be impacted over time.
For example, let’s say you’ve invested $ 100,000 for 20 years and the annual return was 4%. If you paid 0.25% annually, you would have nearly $ 210,000 by the end of those two decades, according to the Securities and Exchange Commission’s Office of Investor Education and Advocacy. On the other hand, if you were paying 1% per year, that $ 100,000 would grow to about $ 180,000.
The average fee paid to an advisor is around 1% of the assets they manage for you, according to NerdWallet. If you use what is known as a robo-advisor – online services that enable automated investment management – the fee is generally between 0.25% and 0.50%.
For mutual funds, the annual expense is expressed as an expense ratio and averages 0.51%, according to State Street. For ETFs it is 0.2%.
“If [fees] baked into the selected funds as an expense ratio, charged as a brokerage fee on the investment account or added as a stock exchange commission when buying or selling the investment, it is important that an investor takes the time to understand the associated costs that they may face “, said Williams.
Of course, this shouldn’t be your only consideration.
“While minimizing fees tends to maximize performance over time, don’t let price alone dominate your decisions,” said Williams.
If you are dealing with a financial advisor and you are unsure of the total amount you will be paying for their services and investments, then it is worth asking.
“Ask how they are compensated, what that fee is covered, and if there are other costs associated with their services,” Williams said.