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Fees! Fees! Millions of Fees!
Fee-ndish Fees.
Fees, you can't avoid 'em, but knowing whether they're bogus can save you a lot of money long term.
You can't completely avoid investment fees, but using a low cost brokerage will allow you to minimize them. The table summarizes common fees you might see attached to a fund. Understand what they are an when to avoid them.
| Fee | When you pay it |
|---|---|
| Front load | Cost to buy into a fund or ETF. |
| Back load | Cost to sell your investment. |
| Expense ratio (ER) | Cost of owning a fund, paid yearly normally as a percentage of the value of the investment. |
| 12B-1 | An annual marketing or distribution fee. Never worth paying for |
Fees are insidious. Often marketed as small % built into the cost of owning a fund/ETF, a seemingly small increase can cause a dramic drop in the value of your investments overtime because they effectively reduce your return each year and this loss compounds over time.
For example, with a starting balance of $10,000, and investing $1,000 a month for 40 years, an expense ratio of 1% could end up costing you more than $700,000.
Don't believe me? I built an interactive fee calculator that lets you play around and see how much fees can affect your performance. Even with a modest portfolio you can lose hundreds of thousands of dollars over your life time if you don't pay attention.
Dave Ramsey seems to think front load fees are a good idea. I disagree. High loads = high expense ratios in a lot of cases. Pick any major well regarded stock fund/ETF from a major brokerage such as Vanguard or Fidelity and you'll see they are almost always no load and have a low ER to boot. Load fees are a red flag for bad management and should be avoided at all costs. They are just a waste of your money.
In the early days of the mutual fund business, the 12b-1 fee was introducted because it was believed that by marketing a mutual fund, its assets would increase and management could lower expenses through economies of scale. Mutual fund assets from companies such as Vanguard that do not actively market themselves still grew rapidly taking in trillions of dollars without any help. You might be asking what the point of this fee is then and you'd be right. Critics seriously question the justification for using and today it's mainly used to pay commissions to salespeople for selling a fund's shares. Another waste of your money.
So what does a low cost fund look like?
Glad you asked. Here a few funds to give you an idea of what high qualit low cost funds look like. BTW you consider having these in your portfolio if you don't already.
| Fund | Symbol | Load | Expense Ratio |
|---|---|---|---|
| Vanguard Total Stock Market Index Fund ETF | VTI | $0 | 0.03% |
| Fidelity Total Market Index Fund | FSKAX | $0 | 0.01% |
| Schwab Total Stock Market Index Fund | SWTSX | $0 | 0.03% |
Take home
- Load fees are charged by subpar companies for overpriced funds. All the good investments you'll ever need can bought for $0 at a reputable brokerage.
- You can't escape the expense ratio (it does cost a company to run a fund), but you can minimize it so it's practically non-existant.
- Try my interactive fee calculator.
What investment fees do you pay? Do you think they are worth it?