Conquering Your Fear of Fees

Savvy investors know to read the fine print about money-management charges.
Conquering Your Fear of Fees
Magazine Contributor

This story appears in the October 2009 issue of Entrepreneur. Subscribe »

As business owners, we pride ourselves on knowing what things cost and on never paying retail (unless, of course, we run out of toner cartridges in the middle of the afternoon before a big presentation).

That's why, when it comes to investing, trying to get the best deal on money-management fees can be so frustrating. Even if you decide to manage your own money instead of handing it over to a brokerage firm, it's hard to avoid paying fees.

Turn to the Authority
The Financial Industry Regulatory Authority (FINRA), the largest independent regulator of securities firms doing business in the United States, offers a wide range of investment education materials on its website, including calculators, tools and quizzes.

Features such as an investor knowledge quiz, for example, tests your investment knowledge against the results of a FINRA survey (and explains the answers).

FINRA's fund analyzer , meanwhile, offers a live data feed that captures expense information for thousands of funds and analyzes the impact that mutual fund fees can have on your investments over time. Choose up to three funds, type in the amount of money you plan to invest and how long you plan to keep the fund, and the analyzer does the rest. For investors with a wide range of knowledge, FINRA's tools are useful for everything from calculating potential return on investment to checking the background of a broker.

Let's say, for example, that you decide to put your money in a mutual fund that invests in a market basket of S&P 500 stocks. Even if there's no upfront sales commission when you buy the fund, you may still end up paying ongoing annual management fees--plus additional fees when you sell the fund down the road. And while every fund is required to disclose these fees in its prospectus, it's often hard for even the savviest investor to decipher the fine print.

That's important, because all those little fees add up and can become a huge drag on your portfolio's performance.

The first step to getting a handle on money management fees is to understand how money managers and mutual funds work and how much they charge for their products and services. Money managers who build and manage a client's portfolio of stocks, bonds and other securities typically charge an annual fee based on a small percentage of assets under management. These fees can vary from a quarter of one percent (25 basis points) to manage a stable portfolio of cash and bonds to a full percentage (100 basis points) or more to manage a more active portfolio of small cap stocks. The good news for investors is that money-management fees are not set in stone and, given the current economic climate, investors with big portfolios can often name their own price.

Mutual funds are a different story. In addition to sales commissions (called "sales loads") that go to your broker, you may end up paying portfolio management fees, transaction fees, fees to withdraw the money early ("redemption fees") and fees that are charged if the value of your account falls below a certain level. Always look at the fund's Total Annual Fund Operating Expenses, also known as the fund's expense ratio. You can find this information in the fund's prospectus, or on its website, and it will tell you what percentage of the fund's total assets goes toward paying fees instead of putting money to work. While a fund with higher than average fees isn't necessarily bad, its manager will have to do better than his peers to deliver a comparable return on investment.

When it comes to investing, it pays to do your homework. The pennies that you save on fees today can put big dollars in your pocket down the road.

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