One of the most efficient ways to build wealth over time is to invest. When you invest, you put the power of compound interest to work on your behalf, allowing the earnings on your original capital to work for you -- on top of the fact that your original investment keeps earning.
The unfortunate reality of investing, though, is that you have to pay fees. There is no way to avoid all fees, but you can avoid some of the unnecessary fees. You should try to avoid fees because they erode your wealth, lowering your real returns and resulting in lost opportunities.
Take a look at your investment account statements, and determine whether or not you are paying any of these 4 fees you should be avoiding:
1. Account Fees
This is a major offender. Some brokerages charge you a monthly maintenance fee, or an annual fee. This is unnecessary, especially considering the fact that there are plenty of brokerages out there that won’t charge you account fees.
Also be wary of brokers that charge inactivity fees and other similar account fees. Look for brokers that are straightforward, and that won’t charge you a fee just because you have an account.
2. Sales Loads
When you buy mutual funds, sometimes you end up paying a sales load. There are two main types of loans: front-end loads and back-end loads. With the front load, the amount you invest is shaved a little at the front. That means your $10,000 investment might only be an $8,000 investment if there’s a 2% front load.
On top of that, some funds charge a bank end load when you sell. Sometimes the back end load is reduced if you wait a few years to sell (check the minimum). The worst is when you are charged a front-end load and a back-end load. Remember, loads are charged on top of other fees.
3. Marketing Fees
These fees, also called 12b-1 fees, are costs a fund pays for marketing. That’s right, a fund can pass its marketing costs directly on to you in the form of extra fees. If you buy funds, avoid those that charge these extra fees. There are plenty of funds out there (often index funds) that don’t charge sales loads or marketing fees.
4. High Investment Fees
Yes, you will have to pay fees. But there’s no reason to pay high fees. There are online brokers that charge as little as $4.95 (and sometimes even less) per transaction. There’s no reason to pay $9.95 per transaction. While you’ll have to pay expense ratios with ETFs and mutual/index funds, there are plenty of low-cost options. Don’t pay more than 2% when you can buy an ETF with an expense ratio of 0.10% (or less). You can also find brokers that offer a range of commission-free ETFs, which means you don’t have to worry about the transaction fee; just pay the expense ratio.
Do your research. Don’t let fees erode your wealth and reduce the effectiveness of your portfolio. Look into what fees you are paying, and then do a little comparison shopping. You might be surprised at how efficient your portfolio can be without all those fees dragging it down.