Paying Too Much in Fees? It May be Time for Some Spring-Cleaning

Yesterday was the first day of spring. For my spouse, that means being in the throes of March Madness and NCAA basketball. For my kids, it means the countdown to the end of the school year can officially begin.

For me, it means it’s time to get the house ready for one thing: spring cleaning!

If you’ve followed me for a while now, you know I’m a big fan of Marie Kondo and her best-selling book The Life-changing Magic of Tidying Up on de-cluttering and minimalism. Today, I’m going to laser focus on one area of your finances that likely needs some de-cluttering: fees.

If you’ve invested some of your money, whether through your employer sponsored retirement plan, through opening up your own Individual Retirement Account (IRA), or perhaps through a taxable brokerage account, you are likely paying fees on the investments you’ve purchased. But do you know how much you are paying, and why? If not, it may be a great time to dig around your investment portfolio and see if there’s some quick “cleaning up” that needs to be done.

Common fees include:

Expense Ratios: If you own mutual funds or exchange-traded funds (ETFs) in your portfolio, you are paying an expense ratio. This is the annual fee that these funds charge their shareholders that is typically a total of their management fees, 12b-1 marketing fees, administrative fees, operating costs and other costs incurred.

Expense ratios can vary; funds that are actively managed are usually higher, around 0.5-1.5% on average, while funds that are more passive and follow an index, such as the S&P 500 or the Barclays Aggregate U.S. Bond Index, can typically be closer to 0.25% (and lower for Vanguard Funds). You should be able to easily find the expense ratio that you are paying on a mutual fund or EFT through a quick Google search or by going to a site like Morningstar or Yahoo Finance.

Load: In addition to the expense ratio, you may own mutual funds that comes with a sales charge or commission, called a LOAD. A front-end load means the commission or sales charged was charged to you at the time of purchase, or up front; a back-end load means it is charged when you redeem or exit the mutual fund.

So, as an example, if you purchased a $10,000 of a front-end loaded fund with a 2% front-end load, you would pay an additional $200. If it were a back-end load, and you were to sell $10,000 of the same fund, you would receive only $9,800.

If, after doing some research, you see that you were sold loaded mutual funds, it may be worth having a discussion with the broker or advisor who sold you those funds. While you won’t be able to reclaim those costs, you may want to consider changing advisors if you believe there was a conflict of interest involved when those funds were recommended to you for purchase.

Transaction Fees: Brokerage accounts will charge a fee each time an investment is bought or sold (traded) in your account, that may range anywhere from $7 – $70 per trade. While it’s important to have a rebalancing strategy in place to make sure your portfolio is allocated appropriately, transaction fees can add up quickly by frequent trading and can drag down your returns. It’s important to keep a check on trading and make sure it’s being done strategically.

Custodian Fees: Some brokerage accounts may charge an annual fee, much like what you might see on some credit cards, ranging from $25-$150 typically. Some firms also charge what’s called an account closing fee upon shutting down or transferring an account. If you are closing an account as a result of being able to work with a particular advisor at another firm, it’s worth asking for the new advisor to waive the fees or pay them on your behalf.

401(k) Fees: Most employer sponsored retirement plans charge another fee on top of everything else, to administer the plan. While there’s not much you can do to “spring-clean” this, recent regulations at least require that plans are more transparent about what these charges are, whereas before they were often buried in small print. If you have changed employers, but still have money invested with an old plan, it may be worthwhile to see if you can do a direct rollover into an IRA which may lower the cost you are paying.

Investment Management and/or Advisory Fees: Finally, you may be charged a fee for managing the portfolio in your investments and/or a separate fee for developing a financial plan. These fees vary widely based on your advisor, not only in the amount but the way that they are charged. Some advisors charge by the hour, some as a percentage of the total amount of assets that they are managing, some a flat or retainer fee.

What’s most important here, is transparency. There’s nothing wrong with charging for advice, particular if it’s good and objective advice, but the key here is that you understand exactly what you are being charged and why. If you don’t yet have an advisor or planner, do your due diligence before committing to make sure you understand and are comfortable with their fee structure.

So, before the weather gets too nice, perhaps during a day when it’s raining or when the March winds are blowing just a little too strongly to be out and about, set aside an hour or so to “spring-clean” your investments and see if you are incurring any fees that need to be swept away.