We’ve told you before: passive investing is the best way for most of us to earn money via the stock market. You pick some solid mutual funds, then you essentially “set and forget” your investments. However, these mutual funds come with fees, and Personal Capital shows us just how much.
Even if they aren’t actively managed, mutual funds still include fees, or expense ratios. The brokerage firm that curates the fund (like Vanguard or Fidelity or Ameritrade) charges this fee. It’s usually a small percentage, but it can add up. Personal Capital analyzed eleven of the major firms to rank just how much they charge customers. Merrill Lynch came in at the highest, with a 0.68 percent fee. Scottrade was the lowest at 0.17 percent.
Interestingly, Vanguard wasn’t included in their roundup, and Vanguard funds are known for having incredibly low expense ratios. According to Vanguard, their average ratio is a mere 0.18 percent. The numbers are interesting to look at, but if your brokerage firm isn’t on this list, you can use a tool like FeeX to see exactly how much you’re paying in fees.
There are a few things keep in mind when looking at these numbers. First, the above graphic doesn’t consider the average return of each brokerage, meaning they might charge more for a reason: because they earn you more money. Second, each firm has lots of different funds and their fees vary; the number you see is an average. Finally, it’s tough to avoid paying any fees at all when you invest. Paying an expense ratio sort of comes with the territory of “buy and hold” investing.
While we’re fans of passive, hands-off investing, plenty of individual investors work with brokerage companies that actively manage their investments. Personal Capital’s white paper also includes what the popular firms charge for doing this, on average. If you’re paying this fee, you want to make sure you’re getting your money’s worth. Money site Financial Samurai puts it this way:
If you were put into an actively managed mutual fund created by a wealth management company that is also charging you an annual advisory fee, you’ve got to immediately ask your advisor WHY with all the lower cost options out there. We know why, but it’s good to make them explain themselves for not looking out for your best interest in order to make themselves more money.
Once they’ve fumbled about trying to explain why their actively managed mutual funds are the best, really ask yourself whether they are worth the fees you are paying every year. If the answer is “no,” then move your money! OK, maybe give them a three month probation to prove themselves, but after that, find an alternative if nothing changes. It’s much easier than you think.
For more detail, check out Personal Capital’s paper. Financial Samurai also explains these fees in more detail at the link below.
The Real Cost of Fees | Personal Capital via Financial Samurai
