By Xavier Brenner It's one of the big ironies in investing. You spend hours assessing a financial manager's strategy and performance record, but neglect to ask about fees. Then you wake up one day and realize that the 7% return on your carefully crafted portfolio is actually more like 5%.
The culprit? All manner of stated and hidden fees that you didn't bother asking about. Investing isn't free. Investment products and services come with costs and fees. They may seem trivial in isolation, but taken together these costs can take a big bite out of your nest egg over the long term. If you invested $100,000 and assumed 4% annual growth, your portfolio would take a $10,000 hit from a 0.50% annual fee and a $30,000 haircut if the fee burden was 1%, according to a recent SEC investment advisory.
So it pays to educate yourself about the sometimes opaque world of investment advisory fees. Here's how to bullet-proof your portfolio from excessive and well-hidden fees.
Broadly speaking, there are two broad categories of fees. Transactional fees reflect the cost to you of buying, settling or selling a security.The second type of fees (usually calculated on an annual basis) reflect overhead and administrative costs to cover portfolio management, fund administration, fund accounting and pricing, shareholder services (such as call centers and websites), distribution charges, and so on. Special care needs to be taken when assessing mutual fund commissions, also known as loads. There are front-end loads, back-end loads and ongoing loads. Mutual funds can be useful investments in any portfolio, but do the math on commissions. You will need returns that exceed these costs before you make any money.