What does investment fee mean?

No matter how an investor enters the market, they will pay some type of commission. This can be the quarterly deduction made by a financial advisor, or the trading costs and account fees of an online brokerage account, or management fees deducted regularly from an investment fund. That cost is deducted from assets and represents a burden on any return an investor may obtain over time. The expense ratio is not deducted from your account, but the return on investment you receive is already net of fees.

When an investment professional (a financial planner, advisor, or broker) offers advice, this is how you get paid. You have the right to know how much you are paying and how someone is compensated for referring you to an investment. The following graph shows an investment portfolio with an annual return of 4% over 20 years when the investment has a continuous commission of 0.25%, 0.50% or 1%. Many hedge funds now offer rates such as “1” and “10” or “1.5” and “15”, a trend referred to as “commission compression” in the industry.

One-time transaction fees work more like a fixed fee, such as a certain amount of dollars per trade. But it's worth noting that these platforms usually rely heavily on mutual funds, which charge their own fees in addition to those on the platform. Finally, contingent deferred sales charges may not be generated at all if the investor remains in the fund for a specified period of time. Some investment advisors and brokers may charge you a commission if you decide to close and transfer your account to another company.

Investment decisions should be based on an individual's specific financial needs, objectives and risk profile. Some investments, such as hedge funds, charge a performance fee based on the fund's success, but they are not widely used in most mutual funds. So, if you have an account that invests in funds, you'll likely have to pay both an advisory fee and an expense ratio fee. Before investing, take the time to understand all the investment fees associated with your investment.

In the case of retirement accounts, such as IRAs, there is usually an annual custody fee, which covers the IRS reports required for these types of accounts.

Alvin Abrachinsky
Alvin Abrachinsky

Certified zombie evangelist. Certified food maven. Friendly bacon advocate. Unapologetic coffee specialist. General tv practitioner. Award-winning beer enthusiast.

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