Investment fees may be a necessary evil, but that doesn’t mean they have to be excessive.
Before you can control your cost of investing, you should know what you’re paying for when you invest—what the most common expenses are and what the services they cover. Then, you can look for ways to lessen the impact fees can have on your overall investment return.
First, let’s review the investment fees you’re likely to see most often.
The Most Common Investment Fees
Management fees: One of the features mutual funds offer is expertise. By investing in a fund, everyday investors can tap the experience and acumen of a professional asset manager or investment advisor.
That experience and acumen doesn’t come for free, of course. Mutual fund shareholders bear the cost of professional management collectively by paying a management fee based on the value of the assets invested in the fund. These fees are reported in fund prospectuses and roll up into a fund’s expense ratio.
Management fees can vary depending on the type of fund, and funds that are more specialized (e.g., small-cap, international or sector funds) typically come with higher management fees. The reason is, these specialized funds often require specialized knowledge or expertise, and specialized managers command higher fees for their expertise.
Administrative fees: Mutual fund companies incur costs for the operation their funds (exclusive of investment management.) Operations would include record-keeping services for fund shareholders, plus accounting, custodial, legal and other services that are necessary to run the fund on a day-to-day basis.
These costs are typically included in administrative fees that also roll up into a fund’s expense ratio. Like investment management fees, administrative costs can vary among different funds. Larger funds often can operate with greater economies of scale, and shareholders will pay a smaller proportion of administrative fees individually when there are more assets under management in the fund.
Sales fees: A significant share of the money invested in mutual funds comes through third-party intermediaries, such as brokers. Brokers and other types of financial representatives are paid through commissions on sales, and those payments are usually borne by investors through sales charges.
Funds that levy sales charges on investors are called load funds. There are two primary types of load funds. Front-end load funds charge investors a fee on assets when they come into the funds. Conversely, back-end load funds charge fees when investors withdraw money from the funds.
Fees for loads and other sales charges vary among different fund share classes. One share class isn’t necessarily better than another, but certain share classes can be advantageous based on the type of investor you are.
Also bear in mind not all mutual funds charge front-end or back-end sales fees. No-load funds don’t charge anything to investors when they purchase or redeem shares. But these funds may still pay commissions to brokers under 12b-1 fees, which typically cover the costs to market and distribute the funds.
Transaction fees: The fees mentioned above relate to mutual fund investing, but other types of investments come with expenses too. Most commonly, investors pay transaction fees to brokers and other intermediaries when buying or selling securities such as stocks.
Traditional brokers will charge a percentage fee based on the value of the transaction. Online and discount brokers commonly charge flat dollar-amount fees for each trade (either when buying or selling a stock.)
Surrender fees are a transaction-based cost typically associated with life insurance policies and annuity contracts. If the policy or contract holder wants access to their money (their principal or premium) before a specified time, the insurer will charge this fee for giving up some or all of their contract value.
This story originally appeared on ValuePenguin.