The Importance of Low Costs

August 24, 2006

In SmartMoney’s Save 50% on Everything article, Anne Kadet says "Fussing over investment fees is a bore, but if you want to get rich, it’s a must."

I agree.  Keeping investment costs at a minimum is one of the most important things you can do to have a successful portfolio.

Investment costs (for mutual funds) include:

Annual operating costs – mutual funds have an annual operating cost to cover fund manager salaries, marketing costs, etc.  These can range from 0.20% up to 3.0%.  Index funds and Exchange Traded Funds (ETFs) will be at the lower end of the range, with specialized, actively-managed funds at the top end. 

Commissions – many mutual funds charge a commission, which goes to the person who sold you the fund.  Commissions can be charged up front, when you sell the fund, or continuously, and typically range from 3% to 6%.

Redemption fees – to discourage market timing, or active trading, some funds have a redemption fee.  Redemption fees average about 2% and usually occur if you sell shares of a fund within a certain time period, such as 6 months to a year.

Transaction costs – unless you purchase the mutual fund directly from the mutual fund company, you will probably have to pay a transaction fee to purchase or redeem shares.  This is true for ETFs, shares of stock, or individual bonds as well.  Transaction fees can be a flat fee per trade, or they can be a percentage based on the value of the securities traded.  Discount brokerages will have lower fees than full service brokerages, but fees vary widely, so you’ll need to shop around.

In addition, there are many other fees you may encounter, such as account maintenance fees, IRA fees, inactivity fees, transfer fees and more.

The bottom line is that money that’s not working for you is money wasted.  The more money you pay for investment fees, the less money that is working for you.  Saving 1% per year in investment costs, could mean 20% more money in your portfolio after 20 years.

More resources:

Don’t Let Brokerage Fees Undermine Your Returns
Mutual Fund Fees and Expenses – Mutual Fund Fees


Leave a Reply


Beacon Financial Advisors, LLC, is a fee-only financial planning and Registered Investment Advisory firm headquartered in Lee’s Summit, Missouri and serving the greater Kansas City area.

The firm offers comprehensive financial planning services. Beacon advisors work solely for their clients. Click here to learn more about our services.

About Us

Kristine McKinley, CFP®, CPA, is the founding principal of Beacon Financial Advisors, LLC, an independent, fee-only financial planning firm located in Lee’s Summit, Missouri and serving the greater Kansas City area.

Kristine focuses on providing fee-only financial planning, investment advice, and tax preparation to individuals and families from all income levels.  About Us

In the News

Investment News – Kristine McKinley discusses the 0% Social Security COLA (for 2016) in No Social Security cost-of-living adjustment in 2016.

Kiplinger Magazine/NAPFA – Kristine McKinley answered reader’s tax questions during the 2013 Jump Start Your Retirement Plan Days sponsored by Kiplinger magazine and the NAPFA Consumer Education Foundation.