Investment services fees add up quickly

by Troy Kennedy

for the Business Journal

It is hard to discuss investment and financial services without discussing fees. There are a variety of fee arrangements in the marketplace. Common methods used in charging for services include:

Sales commissions. Most mutual funds and insurance products pay a commission to the person and organization selling their product. Exact amounts vary, but 3 percent to 8 percent is common (generally higher for insurance products). The broker or agent usually shares this commission with their company. Most brokers or agents represent a limited number of mutual funds and insurance companies.

Transaction fees. Brokerage firms charge a fee each time a security is bought or sold. National estimates place average brokerage fees at around 2 percent to 3 percent of an investor's account value each year. The broker is compensated when the investor buys or sells securities.

Wrap fees. Some brokerage firms package fees for investment management, buy/sell transactions and other services into a special account with a wrap fee. A typical wrap fee runs about 3 percent of the account's market value each year.

Internal management fees. All mutual funds even those without sales commissions (no-load funds) charge a fee for managing the fund. Internal fund fees range from 0.2 percent to 3 percent annually, depending on the complexity of the portfolio. Sales commissions, if any, are over and above management fees. These fees are paid to the portfolio manager. Generally the more aggressive the fund, the higher the management expense.

Also, Class A share mutual funds (where you pay the commission up front) generally have lower annual management expenses. Class B shares (where you pay the commission when you exit the fund) generally have higher annual expenses. No-load (no commission) equity mutual funds' annual expense typically will average 1.65 percent of the fund balance.

Asset management fees. Trust companies and other investment managers charge ongoing fees to actively monitor and manage investments (fee-based). Annual fees typically average 1 percent. These fees are the most attractive for the typical investor, because the earnings of the investment manager is tied to the performance of your account. The better your account performs, the better the manager does. An asset manager is not compensated on individual investments[[In-content Ad]]