You Work Hard for Your Money—Keep More of It When Investing

As you work hard to earn your money, it’s crucial to understand that investing, while a powerful tool for wealth growth, comes with its own set of costs. By grasping these costs, you can make informed decisions that protect your profits and keep more of your hard-earned money.

When you invest, there’s always the risk that could eat into your profits. However, another factor that can slowly drain your returns is the various costs associated with investing, which range from fees to commissions. These costs can quickly add up, but the good news is it’s possible to keep your investment expenses low. In the following sections, we’ll explore how you can minimize these costs and protect your profits.

Key Takeaways

• Investment costs include brokerage, commissions, and advisory fees.
• Fees and commissions differ from firm to firm.
• Many brokerages have eliminated fees for trading stocks, ETFs, or mutual funds.
• You can reduce expenses by choosing no-fee brokers or robo-advisors.
• Robo-advisors, which rely on algorithms to manage portfolios, often have low or no fees.

Types of Investment Fees

Almost all investments come with some form of fee. These fees are how banks and financial institutions make money while offering services to you. Even the most straightforward investment tools can carry fees. Understanding this landscape is key to making sound investment decisions.

For instance, some savings accounts charge a fee if you don’t maintain a minimum balance or withdraw more than once a month. Why are you being accused of fees when it’s your money? Because these accounts come with services, even if they’re designed to help you save.

This principle of charging fees holds true across the board. Financial institutions charge fees for keeping and handling your accounts, but they also charge when you move your money. Sometimes, you may feel like you’re paying more fees than you earn on your investments. Thankfully, there are ways to minimize these expenses. By choosing no-fee brokers or robo-advisors, you can feel safe and protected, knowing that your investment costs are under control.

Brokerage Fees

Financial companies such as brokerage firms, real estate houses, or financial institutions often charge brokerage fees. These fees are generally billed annually to maintain your account, provide research access, and allow investment platform access.

Brokerage fees can also apply if your account becomes inactive or dormant. Depending on the firm’s policies, the fees may be a percentage of the assets in your account or charged as a flat fee.

Commissions

Brokers and financial advisors often charge commissions, which are trading fees. These cover the costs of executing orders to buy or sell securities like stocks, bonds, or options.

Commission rates vary by firm, so it is essential to review and understand a brokerage’s fee structure before deciding to work with it.

Management or Advisory Fees

Management or advisory fees are charged by firms that manage investment funds. These fees compensate fund managers for their expertise in managing your investments. These fees typically depend on the percentage of the assets under management (AUM) in each fund.

Understanding Trading Expenses

There’s no one-size-fits-all regarding trading commissions and fees charged by brokerage firms. Some brokerages impose high fees for each trade, while others charge significantly less, depending on their services.

Fortunately, discount brokers no longer charge fees for trading stocks, exchange-traded funds (ETFs), or mutual funds. This change has significantly reduced costs for many investors. However, fees still apply if you trade other securities like options, futures, and bonds.

The fee structure often depends on the number of contracts or bonds traded. For instance, if a broker charges $1.50 per futures contract, the more contracts you trade, the higher the cost. Therefore, you need to ensure that your earnings surpass the expenses you incur.

For example, if you trade 10 futures contracts, you would incur a $15 fee. If your trade results in a $5 profit, your net return is a loss of $10. You would need to make at least $15 from the trade just to break even.

Some brokerage firms may offer commission discounts for high-volume traders. For instance, a broker might charge $10 per trade for regular clients but lower the fee to $5 for those making 50 or more monthly trades.

Another arrangement might be an agreed-upon flat annual percentage fee. With this fee, it doesn’t matter how frequently you trade—you pay the same percentage annually.

Minimizing Investment Costs

While fees are a standard part of the financial world, you don’t have to let them eat away at your profits. Here’s how you can keep your investment expenses down.

You can start investing with firms that don’t charge commissions or fees for stock and ETF trades. Some of these firms also waive minimum deposit requirements, allowing you to start investing with a lower balance without incurring additional charges.

However, it’s essential to check if these firms charge fees for other types of investments or services to ensure the balance the fees are balanced.

Automated investment platforms or robo-advisors are another way to cut down costs. These platforms are algorithm-driven, meaning no human advisors are managing your account. As a result, robo-advisors usually have lower fees, leaving more money in your pocket. Robo-advisors manage and reallocate your investments based on your goals and risk tolerance.

Expert Advice: Reducing Fees

Here are three quick tips from Dave Rowan, CFP®, of Rowan Financial LLC in Bethlehem, PA:

• Consider ETFs over mutual funds: ETFs generally have lower expense ratios than mutual funds. It’s easy to build a diversified, low-cost portfolio using ETFs with an expense ratio of 0.25% or less annually.
• Avoid loaded funds: Stay clear of products with front-end loads, back-end loads, or 12b-1 fees. These are primarily found in mutual funds but not in ETFs.
• Look for fee-free ETFs: Many fund families offer ETFs without trading fees. If you must invest in a fund with trading fees, aim to invest at least $1,000 per trade.

Can You Invest Without Paying Fees?

Yes! Several brokerage firms today, such as E*Trade and Charles Schwab, do not charge fees for trading stocks, ETFs, or mutual funds. You can open an account, deposit funds, and invest in these securities without fees. However, be aware that fees may apply when trading other investments, such as bonds or futures.

How Do Some Investors Pay No Taxes?

Specific legal methods allow investors to avoid paying taxes on their earnings. For example, Roth IRAs are funded with after-tax dollars. When you withdraw from the account, you won’t owe any taxes on your contributions or earnings. Capital losses can also offset ordinary income, reducing the taxes you owe.

What Are Commissions in Investing?

Commissions are fees paid to investment professionals for executing trades on your behalf. These fees are typically a percentage of the value of the trade, compensating the broker or advisor for their services.

The Bottom Line

Investment fees can significantly reduce your returns, so keeping them low is essential. If your primary investments are stocks, ETFs, or mutual funds, most brokerages now offer free trading. However, suppose you’re trading securities with fees, such as futures or bonds. In that case, it’s essential to strategize and minimize these costs as much as possible.