Remember when we explained how compounding may help you earn money on the money you invest? And we showed how your money may grow when you keep contributing to your investment accounts?
Don’t worry, that’s still true — but we need to address the creepers of the investing world. Fees, and how to keep yours low.
How To Make It Happen
There’s no such thing as a free lunch
When you start investing with a or an investment advisor, they will most likely charge a fee for their service. There may be other hidden fees associated with the securities that you buy. These lil’ guys can eat away at your earnings like termites.
Don’t be afraid to ask how much you’ll be charged.
Everyone charges you…some make it clearer than others
If a broker-dealer — a human one or online — says their service is free, know they’re still getting paid somehow. This is usually in the form of sales commissions.
What should an investment advisor charge?
A good rule of thumb is to keep advisor fees under 1% of your assets under management. This is also called “100 basis points.” For instance, Ellevest charges 50 basis points for brokerage, custodial, and investment advisory services.
Look for someone who will charge you less than 1% of your total assets (money) under management.
Look for funds with the lowest fees
To keep fees in check, Ellevest is a huge proponent of low-cost exchange traded funds (ETFs) — that’s why we offer them.
Type of Fund
Actively Managed Mutual Fund
Set up to “beat” (outperform) the market
Actively managed by an investment professional
Very common — most likely what you’d be invested in if you signed up with a traditional advisor
History has shown that “beating” the market is incredibly difficult to do
You may pay taxes on gains you haven’t realized
Fees for active management could be higher than 1% of your assets
Do not trade in and out of the market like an active mutual fund
Offer broad exposure to different securities for lower advisor fees than an actively managed fund
Have a goal of getting you market returns over time
May still have high trading and advisor fees, which can range widely
Exchange Traded Funds (ETFs)
Offer broad exposure to markets like index funds, but trade throughout the day like stocks
Have a reputation for being less expensive than both mutual funds and index funds
Most are managed against a benchmark and offer a low-cost way to achieve market returns
Some are actively managed to beat the market, which means higher fees. It’s important to distinguish this up front