There’s good news and bad news on the investment fee front.
On the positive side of the ledger, investors paid less in fund expenses in 2016 than ever before, on average, as assets continue to flow into lower-cost index mutual funds, exchange-traded funds and institutional share classes.
“Investors have been voting with their feet for low-cost funds,” says Patricia Oey, senior manager research analyst for Morningstar. “In particular, there has been strong demand for passive funds, the average cost of which is 0.17 percent, much lower than the average 0.75 percent for active funds.
[See: These 7 Funds Make You Feel Good About Investing.]
“We see the trend toward low-cost funds as positive, since mutual fund costs have a dollar-for-dollar impact on the returns investors ultimately realize,” she says. “Flows out of active funds reached a cumulative $586 billion in 2015 and 2016. However, the outflows were all from expensive active funds. Low-cost active funds saw positive, albeit small, inflows over the same time period.”
On the negative side, investment fees can really eat into portfolio returns for most Americans. According to the U.S. Securities and Exchange Commission, a 1 percent portfolio fee reduces asset values by about $30,000 over 20 years, compared to a portfolio with 0.25 percent in annual fees.
If those portfolio fees average 2 percent, investment losses are worse. A Vanguard study states that regular 2 percent fund management fees would “wipe out 40 percent of your portfolio’s value.”
Who wants to leave that kind of money on the table? The question is, what to do about it?
“Over a lifetime of investing the amount of fees paid could easily be hundreds of thousands or millions of dollars over time,” says Michael Shea, a financial planner at Applied Capital, in Nashville, Tennessee. “In my opinion, the biggest predictor of returns are fees, trading costs and taxes.”
Check those expense ratios. Shea advises looking up your funds online to check the annual expense ratios (U.S. News has this information on its mutual fund and ETF fund profiles). “This is what the fund charges on an annual basis,” he says. “You don’t see this come out of your account, as it will be baked into your total return.”
Look for the hidden fees. Another good tip on curbing investment fees is knowing where you stand on those fees.
“We believe that in order to reduce costs, one must be committed to getting educated: doing research and questioning your advisors on their strategy and fees,” says Brian Saranovitz, co-founder of Your Retirement Advisor, in Leominster, Massachusetts. “If you’re a do-it-yourself investor, you’ll need to do much more research to understand the particular investment options, their performance and their fee structure.”
[See: Short Selling: 7 Stocks Pro Traders and Billionaires Hate.]
Saranovitz says that hidden fees are especially difficult to uncover with most funds. “Look through the details of a prospectus and you won’t even be able to decipher all of a fund’s fees,” he says. “The internal transaction fees and commissions paid by mutual funds are typically not disclosed.”
Consider passive index funds. Whether you’re doing your own investing or working with an advisor, you can fight back fees and potentially receive higher returns by utilizing a combination of low-cost passive index funds and ETFs, and actively managed funds, Saranovitz says.
Here’s how he breaks that strategy down:
— Index funds and exchange-traded funds typically use passive indexes and charge a fraction of the fees that most active money managers charge. They also have low turnover in their portfolios keeping costs low. However, while less expensive, these funds won’t outperform the index.
— Actively managed funds are managed to outpace the indexes and are appropriate for investors who are concerned about losses in a down market since these managers can use strategies to guard against this risk. It’s critical to pick active managers with care, choosing those with low fees and positive results in both negative and positive markets, as well as those with low turnover (which is the percent of holdings that are bought and sold each year).
If you’re working with a professional investment advisor, you’re best served by working with the lowest cost, highest quality advisor you can find, Saranovitz says. “But beware the industry is plagued with high-fee advisors,” he says. “According to industry data, advisor fees average 1.65 percent and can go as high as 2 percent for a $500,000 portfolio, which is definitely an expensive proposition.”
There are more client-friendly advisors and fee structures, but you need to do a little more research to find them. “Look for an advisor who offers either a flat rate fee or a deeply discounted annual percentage fee based upon assets under management,” Saranovitz says.
Other financial experts say investors should be both diligent and discriminating when fighting back on fees, says Kalen Holliday, communications director at Interactive Brokers, in Greenwich, Connecticut.
“You only want to work with companies that provide a high level of transparency,” Holliday says. “If your financial firm charges sneaky fees, move your money elsewhere.”
Holliday says that in this, the internet era, all investment fees should be clearly spelled out and accessible on the company’s website. “If you have to ask, they aren’t telling you something,” she says.
[See: 9 Things to Know About Robo Advisors.]
Long-term investors really can’t afford to lose up to 40 percent of their portfolio’s value to high fees. So, take a stand, get educated, and fight back on high investment fees.
Decades down the road, when you’re counting your money in retirement, you’ll be glad you did.
More from U.S. News
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3 Ways to Cut Your Investing Fees originally appeared on usnews.com
