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Look Out for These 5 Hidden Investment Fees

Apr 20, 2022 | Research

Many investments come with fees, and too often, those investment fees are not clearly advertised or discussed between broker and client. They’re hidden, and you don’t know how much you’re shelling out until you start to examine your statements. That’s when you discover that your annual gains are much lower than you expected because hidden investment fees dwindled your returns.

At DreamWork Financial Group, we believe knowledge is power, and transparency is key. So, we broke down our list of the top five hidden fees that you’ll likely encounter as you invest.

Hidden Investment Fee #1: Loads

When it comes to the hidden fees in mutual funds, loads are a big culprit. They come in two basic varieties: front-end loads and back-end loads.

A front-end load is a cost incurred at the time of purchase. Consider it a commission on the sale of the mutual fund. It’s deducted from the investment amount, which decreases the amount of your initial investment. For example, if you gave your broker a check for $10,000 and those funds were invested in a mutual fund with a 5.75% front-end load, your initial investment would be reduced by that front-end load. So, instead of purchasing $10,000 worth of shares, you would only purchase $9,425.

As the name implies, a back-end load comes at the end of your investment, or when you decide to sell your shares in the fund. With a back-end load, there is often a time element to consider.  Typically, the amount you owe decreases if you wait longer to sell the fund — serving as an incentive to hold onto your shares. For example, if your fund had a 6% back-end load, you would pay the full 6% if you sold in the first year. If you sold during the second year, you’d pay 5%, and so on. If you held the shares more than seven years, you would pay nothing.

Many of the mutual funds that charge a load, either front-end or back-end, are actively managed. This means that a portfolio manager chooses the underlying investments according to the fund’s purpose. Loads are a way to compensate the management firm. However, there is significant evidence that actively managed mutual funds, those that typically have high sales loads, do not outperform their benchmarks after adjusting for management fees. Over the 20-year period ending in 2020, only a paltry 7% of actively managed large-cap mutual funds outperformed their benchmarks.

Loads are one type of hidden investment fee that you can avoid in many cases. Other investment options like no-load mutual funds, low-cost ETFs, and individual stocks typically do not charge sales loads and could help you reach your investment goals without the added costs.

Hidden Investment Fee #2: 12B-1 fees

Another hidden investment fee common in mutual funds is 12b-1 fees. The name sounds very technical, but these fees are anything but. The 12b-1 fee goes toward marketing and promoting the fund. And by some estimates, they account for nearly $10 billion in investment fees each year.

About 70% of mutual funds charge 12b-1 fees which typically account for a 0.25-0.75% annual expense. These fees are usually built into the fund’s expense ratio—so you may not see a specific charge on your statement detailing this expense. To determine if your investments are subject to a 12b-1 fee, you can review the fund’s prospectus – a document that details the fund’s objective, holdings, and expenses. Like with mutual fund sales loads, 12b-1 fees can often be avoided by choosing investments that are lower-cost, like no-load mutual funds, ETFs, and individual stocks.

Hidden Investment Fee #3: Management fees

A management fee is the fee an investment manager charges to manage a mutual fund. Investment managers are compensated for activities like selecting the securities in the fund, managing the portfolio, and building a profitable investment vehicle. Like with 12b-1 fees, management fees are typically built into a fund’s expense ratio.

Since investment managers must be compensated for their services, management fees are often unavoidable when investing in actively managed mutual funds. But management fees can vary significantly between funds. Usually, these fees are between 0.5 percent and 2 percent.

It may seem like a reasonable assumption that funds with higher management fees generate better results, but this is often not the case. Just like higher salaries do not always equate to better employees, higher management fees don’t necessarily equate to better investment outcomes.

Hidden Investment Fee #4: Trade commissions

Though similarly named, trade commissions are different than the commission a broker might earn for selling you a particular fund or product. In this context, trade commissions refer to the transaction fees that a broker charges you when you buy or sell securities. Typically, these fees range from $5 to $35 per trade. While that might seem like a small amount, when you trade often, these fees can add up quickly.

With most brokers, trade commissions are largely unavoidable, but that isn’t always the case. In any event, being aware of these fees can help you plan for the total cost of your investing strategy.

Hidden Investment Fee #5: Account fees

When you think of account fees, the phrase “nickel-and-diming” comes to mind. That’s because some firms charge these fees for everything from receiving paper statements in the mail to allowing your account to go inactive. Some brokers even charge an annual fee just for having an account. Individually, they are small, but added together, they reduce your return.

Understanding your investment goals, as well as your broker’s fee structure, can help you avoid unnecessary costs. For example, if you don’t plan to trade frequently, choose a broker who doesn’t charge for inactivity, steer clear of brokers who charge annual fees, and opt for emailed statements over paper to reduce these hidden investment fees.

Avoid Hidden Investment Fees with DreamWork Financial Group

They say you’ve got to spend money to make money, and that’s as true in the investment world as it is anywhere else. But you don’t have to let brokers and investment firms blindside you with hidden investment fees.

At DreamWork, we believe in transparency. That’s why all of our fees are clearly stated on our website and communicated to all of our clients. We build our portfolios with low-cost ETFs and individual stocks so that our client’s never need to worry about sales loads or 12b-1 fees.

With Investing Gameplan™ by DreamWork Financial Group, you pay only a flat fee for management of your portfolio. This means we only make more money when you make more money. With this unique investment management program, you can avoid hidden fees and keep more of your returns. To learn more about this program, or to get started today, contact us.