Fees are the vampires of the investing world. They can suck the life out of your returns if you’re not careful. But a little diligence can help you pay lower fees in general, and identify the few times it might be prudent to pay a little more for a quality product.
The fee landscape for retail investors mostly is related to exchange-traded funds, mutual funds and variable annuities.
For all three investments, fees go to administrative and trading costs and the managers who buy and sell the securities in the funds. For mutual funds and variable annuities, there are also sales commissions and marketing and distribution fees.
[See: 7 Tips for Finding the Best Target-Date Retirement Funds to Buy.]
ETFs in general are cheaper because they don’t have the sales commissions or marketing and distribution fees that are associated with the other two investment vehicles, says John Faustino, chief product and strategy officer for fi360, a fiduciary education and technology company. But they also tend to be more formulaic and passively managed than mutual funds.
Mutual funds tend to be more expensive, he says. Some have different expense ratios dependent on how much is being invested, and non-fiduciary financial advisors and brokers they work with have contributed to fee inflation. But investors are wising up, and there are a lot of new passive mutual funds that are cheaper.
Variable annuities are the most expensive of the three because they offer some insurance benefits that the other two products don’t. However, many argue that the insurance isn’t worth what investors pay for it and believe mutual funds and ETFs are better deals, Faustino says.
Sales of variable annuities had their worst year in about 15 years in 2016 as “there’s more awareness of that fee landscape,” he says.
The key to paying less in fees is doing homework. “The best investors are educated investors,” says Dan Yu, managing principal of EisnerAmper Wealth Advisors. “Arm yourself with some data.”
Investors can research funds on several online portals before making purchases — U.S. News & World Report, for instance, has an extensive online database and ranking of ETFs and mutual funds.
When consulting with an advisor, Yu says investors should ask about an investment’s track record and how it’s performed compared with an index.
Also ask what the charges are and what you’re paying your advisor. “Those should be transparent,” he says. Good advisors will give you this information without having to be asked.
[See: 11 Ways to Buy Bank Stocks.]
Only about 20 percent of mutual fund investors are do-it-yourselfers into doing research, with the remainder working with financial advisors or just exposed through their 401(k)s who may not be aware of all the issues with fees, says John Rekenthaler, vice president of research at Morningstar. “You just trust whose showing you this,” he says.
Faustino says to make sure to ask your financial advisor if they are acting as a fiduciary, which means they have a legal obligation to act in a client’s best interests.
There may be a few cases where paying more for actively managed funds could be worth it, but they can also be harder to find.
For stocks that are well covered and have lots of information about them, the market will have them priced about right, Faustino says. So less expensive passive exposure would make sense in this scenario.
But in areas of the market that are less noticed, with fewer analysts covering them, investors can see outperformance with a manager, he says.
While Yu says he will sometimes use an active manager for international stocks, most investments he leans toward are passive ETFs. With the world’s financial markets awash in information these days it’s hard for managers to differentiate themselves, he says.
And identifying managed funds before they outperform takes a lot of work, Rekenthaler says. He only recommends it for people in the business, such as advisors, or the investing “junkies” who enjoy the process of doing research
All three experts recommend Vanguard as a low-fee fund provider, with Rekenthaler saying the company has the lowest cost fund family across the board. Fidelity and Schwab also match Vanguard’s pricing for index-based approaches, he says. Faustino also suggests BlackRock, which distributes iShares ETFs.
For low fees, Yu gives examples of the SPDR S&P 500 ( SPY) or Vanguard S&P 500 ( VOO) ETFs for broad market exposure to large-capitalization stocks. The iShares Russell 2000 Value ( IWN) or iShares Russell 2000 ( IWM) ETFs offer broad, small-cap exposure and the Vanguard FTSE All-World ex-US ETF ( VEU) is good for further diversification with emerging markets, he says.
[See: 9 Psychological Biases That Hurt Investors.]
The large blend iShares Core S&P Total U.S. Stock Market ETF ( ITOT), large growth Vanguard Growth ETF ( VUG) and large value Schwab US Dividend Equity ETF ( SCHD) are among the lowest-cost ETFs from three popular categories, Faustino says.
More from U.S. News
7 of the Worst Stocks to Buy for 2017
10 of the Worst Performing Stocks of 2016
The 25 Best Blue-Chip Stocks to Buy for 2017
How to Reduce Your Investing Fees originally appeared on usnews.com
