Investment Management Firms Share 6 Investment Costs

By Jeremy Sorci | May 03, 2018

You already know that investment professionals don't work for free — nor should they have to. But investment costs and fees reduce your returns, and if you're not working with a fee only wealth advisor you could be paying more than you should. 

Jeremy Sorci is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt CountyDo you understand all the expenses associated with your investments? Read on to discover what our family wealth advisors have to say about the six investment costs you should understand in order to reduce your expenses and maximize your returns.

 Expense Ratios: Keep Wealth Strategies in Mind

Mutual funds and ETFs share a common cost known as expense ratios that include compensation for investment professionals, costs of buying and sell

ing, and even the fund firm's profit. Often, investors don't pay too much attention to expense ratios, but they have a significant impact on your returns.

Keep in mind that a higher expense ratio doesn't equate to a higher quality product, as proven by 2013 research by Nobel Prize-winning Stanford professor William F. Sharpe. When comparing a fund with a high expense ratio to a fund with a low-cost expense ratio, Sharpe found that over a 10-year period, the investor in the low-cost fund ended up with 11.25 percent more wealth, simply due to lower operating costs. Lesson learned: While you can't completely avoid expense ratios, you don't have to spend more than necessary. 

12b-1 Fees and Sales Loads: Pay Attention

12b-1 fees are part of mutual funds' expense ratios. They may be used to generate compensation for reps who sell funds or add revenue-sharing into 401(k) plans. Funds with 12b-1 fees tend to have higher expense ratios, so keep your eyes open when reading the fine print.

When paid upfront, sales loads (also known as front-end loads) act as compensation to an investment professional. They also reduce the amount of money you're investing, which has the potential reduce your returns. 

Jeremy Sorci is a CFP Certified Financial Planner and Financial Advisor with Premier Financial Group in Eureka Humboldt CountyTaxes and Your Comprehensive Financial Plan

Taxes are unavoidable, but you can plan ahead to minimize your tax burden. Keep in mind that:

  • Taxable investments may incur either short- or long-term capital gains taxes
  • Capital gains may be charged on distributions from mutual funds and ETFs
  • Investments in tax-deferred accounts, like 401(k) or IRAs, will be taxed when you take distributions

401(k) Costs and Financial Planning Strategies

Does your 401(k) plan include costs for items such as compensation to the rep or broker who sold the fund in the plan, recordkeeping, or administration? If so, and your employer pays these costs through the plan, these expenses are likely coming out of your account. Add in any expense ratios associated with your 401(k) plan's mutual fund, and you're looking at a potential reduction of return.

Wealth Strategies: Avoid Surrender Charges

Some mutual funds and annuities charge a fee when an investor sells within a certain period of time. Generally, surrender charges may apply from 1 to 12 years after purchasing an annuity; typical surrender charges start at around 7 percent and decrease year-over-year. 

Fees Associated with Investment Professionals

Finally, you will pay for financial advice... but the amount depends on the type of investment professional you work with. For example, a fee-only advisor is paid only for their advice; their compensation isn't tied to the products they offer you. In contrast, an investment professional who's paid through commissions will charge a fee for advice, and also receive compensation for the products they sell. It's easy to see how this may lead to a conflict of interest. That's why it's so important to ask any investment professional you're considering working with to disclose all sources of compensation that may result from working with you.


Posted in Investment Guidance