How to Detect and Avoid Hidden Fees in Your Financial Portfolio

When it comes to financial planning and investing, there are a lot of acronyms and jargon to wade through. It can be difficult to keep track of everything, let alone understand what it all means. That’s why it’s important to be aware of the fees charged by financial institutions, which can eat into your investment returns without you even realizing it.

The challenge that most investors face when it comes to fees is that they often aren’t transparent and easy to find.  Let’s look at these five hidden charges that can eat away at your return!

Management fees

A management fee is the most common investment fee. In exchange-traded funds (ETFs), or mutual funds, professional money managers charge a fee for selecting stocks and bonds. Because it is expressed as a percentage of the investment amount, it is also called an expense ratio.

Since these fees are charged internally within the fund, they will not appear on your account statement. The fund or ETF you own may be charging you a fee even if you do not see it on your account statement.

Sales Loads and Commissions

Commissions and sales loads are interchangeable terms. Both are fees or commissions associated with the purchase of an investment product, like a mutual fund or an annuity. You will be charged a fee based on what you purchase.

A broker or financial advisor will charge you a commission when you purchase an annuity. When you withdraw money from your investment, you may face a surrender charge, which comes out of your investment. Essentially, the surrender charge is a way for the annuity company to recoup the commission they paid to the advisor.

It is also possible to pay a commission or load when you purchase a mutual fund. Depending on the share class and fee structure, charges can be different between funds even within the same fund company.

In order to invest effectively, you should look for “no load” options, since they do not charge upfront commissions or sales loads.

Brokerage Fees

In general, brokerage fees are smaller than those charged by custodians and broker-dealers. Essentially, they are fees you pay for the execution of trades, the service of your accounts, and the safeguarding of your assets by a financial institution. Fees fall into three main categories:

Trading fees: There are fees associated with buying and selling investments, such as stocks, mutual funds, and ETFs. They are typically relatively small, but if you trade frequently, they can add up. Many investment firms have eliminated trading fees in recent years, but some still do or may require you to sign up for electronic delivery of statements before granting you free trades.

Custodial fees: The financial institutions that hold your investments provide a service known as custody. They ensure the safety of your investments and reduce the risk of theft. They also provide reporting on all transactions, including purchases and sales, dividend payments, withdrawals, and even taxable events.

Service fees: Custodians are also in charge of handling various types of account services, such as processing account transfers, wiring funds, and even providing check-writing capabilities. You may be charged a small fee for each of these services.

Brokerage fees are small, but they quickly add up. If you’re not careful, it’s not uncommon to pay a few hundred dollars per year per account for trading, custody, and service.

Turnover and Taxes

Taxes aren’t often regarded as a fee directly related to investments in the same way that management fees are, but how investments are managed and how you own them can have a significant impact on how much money you end up with in the future. Here’s everything you need to know about turnover and how it affects your taxes.

Turnover is a measurement of how much of an investment, such as a mutual fund or exchange-traded fund (ETF), is replaced or turned over each year. So, if a fund owned 100 stocks and sold 25 of them while buying another 25, the turnover would be 25% (they replaced 25% of the fund’s holdings).

A taxable event occurs when a stock or bond is sold and replaced with a new holding. These taxable events are distributed to fund or ETF investors on a regular basis. This means that even if you do not sell the fund or ETF, you will have to report and pay taxes on the capital gains. Increased turnover means more taxable transactions, which means more potential taxes.

Turnover is important only if you own the investment in a taxable investment account. The bottom line is that you must be aware of the turnover of your investments and the type of account in which they are held.

In many countries, there are options that are tax efficient that can help reduce this which in turn allows your money to grow more.

The Good News

Investment fees must be reported or disclosed somewhere. The bad news is that “somewhere” can be difficult to locate, and you must know where to look. Fees are difficult to detect with the untrained eye, but they are slowly eroding the growth of your money. Here are some places to look for hidden investment fees:

Account agreements: You will receive an account agreement when you open an account. The account agreement must include a list of all fees that you may be charged.

Account statements: You’ll have to look for it, but there should be a section dedicated to transactions or fees. Any financial advisor fees can be found here (or AUM fees).

Disclosure documents: Read them carefully if you are required to sign one to purchase an investment or an annuity. Fees are frequently very high and must be disclosed before your purchase.

Trade confirmations: You will receive a trade confirmation for each trade that you or an advisor places. It will most likely be posted to your online account, so log in and search for them. Any trading fees you pay to purchase the investment will be listed on the confirmation.

Investment websites: If you want to know what management fees you are paying for a mutual fund or ETF, you can look it up on their websites. All fees must be disclosed so that you know exactly what you are paying.

An educated investor is a good investor. Knowing where to look for your fees so you can see what you’re paying if it’s fair, and if you need to make a change

Being aware of the fees charged by financial institutions is important for all investors, as these fees can eat into your investment returns without you even realizing it. The challenge that most investors face when it comes to fees is that they often aren’t transparent and easy to find. At SJB, we believe that understanding all aspects of your finances is key to making smart decisions about your money. That’s why we’re committed to providing our clients with clear, concise information about the fees associated with our services. If you have any questions about the fees charged by SJB or any other financial institution, please don’t hesitate to contact us. We’re here to help!