Our financial lives are
littered with fees: for buying a home, hiring an investment adviser, putting
money into mutual funds.
We can't escape them. But
there are ways to reduce the pain.
Most fees can be reduced,
negotiated or eliminated entirely if you are willing to comparison shop and
haggle, and it often is worth the extra effort.
Take one stark example:
An investor who had $200,000 in a mutual fund would pay $2,500 based on the
average annual fee, while the same sum in a broad-stock-market index fund could
cost as little as $80. Over 30 years, with fees and returns compounded
annually, that gap alone would cost the higher-fee investor about $570,000, if
both investments return 8% a year before fees.
In an era of low interest
rates, when many investments generate unexciting returns, taking the time to
lower your costs can be particularly worthwhile.
Here is how to pay less
when you are seeking financial advice, making investments and purchasing a
Advisers at large Wall
Street banks typically charge investors around 1% of assets under management a
year and provide a variety of services, such as helping clients plan for
retirement, choose an appropriate balance of investments and pick individual
stocks and funds.
Investors can cut that
fee significantly if they accept a little less hand-holding.
Many independent financial advisers will prepare a bare-bones
financial plan, including a household budget analysis, a projection of
retirement needs and a model portfolio of stocks and bonds, for $500 to $1,500,
says Eleanor Blayney, consumer
advocate for the Certified Financial Planner Board of Standards in Washington.
Those services typically don't include actually managing a client's money.
For an investor with a
portfolio of $200,000, that could mean saving $500 or more. And many advisers
at Wall Street firms will only work with clients who have $500,000 to $1
million or more to invest.
Investors who want to
hire an adviser should meet with at least three candidates, and don't be afraid
to ask an adviser to lower fees if a competitor charges less for the same
There are other low-fee
options. The least-expensive choice is often a fee-only planner who charges by
the hour or project. That can work well for an investor who only needs a quick
Another option: Go
An array of new firms
offers financial advice over the Internet. The firms might not capture the
nuances that a traditional adviser would spot in a face-to-face meeting, but
they generally charge less.
Stock-trading fees have
fallen sharply over the last few decades. In 1991, Charles Schwab charged $74 a
trade, according to research by Aite Group, a Boston data firm.
The latest price war
started in 2010, as discount brokerages tried to lure back investors who had
curtailed trading activity after getting burned by stock-market losses during
the financial crisis.
Active investors can
still benefit, as prices haven't bounced back up. Currently the average fee per
trade is $8.82, according to San Francisco-based NerdWallet.com, which tracks
financial firm fees.
Investors who trade
infrequently, or who will do most of their trading right after they open an
account, should check for promotions that might let them avoid fees altogether.
Mutual Funds and ETFs
Mutual-fund fees have
been coming down in recent years. But there is still a big gap between what a
typical investor and a cost-conscious investor can pay.
Fees vary greatly, based
on a number of factors, including the fund company, the type of asset and the
The average mutual fund had an
expense ratio of 1.25% in 2013—or $125 annually per $10,000 invested—down from
a peak of 1.47% in 2003, according to Chicago-based investment-researcher
Morningstar. But for many types of funds, investors can do much better.
Index funds and ETFs tend
to have the lowest fees. When deciding between funds that track the same index,
"virtually every time, you should go with the lower cost fund," says
Russel Kinnel, who researches funds for Morningstar.
To cut expenses even
more, investors might consider ETFs that track slightly obscure indexes that
are similar to pricier peers.
For example, an investor
might traditionally use an S&P 500 ETF to invest in large-company stocks.
However, according to ETF.com, the cheapest large-cap stock ETF is Schwab U.S.
Large-Cap, which has an expense ratio of 0.04% and tracks the Dow Jones U.S.
Large-Cap Total Stock Market Index. (See the lowest-cost ETFs for various fund
categories in the table on this page.)
For ETFs, investors also
will want to make sure that the fund's "bid-ask spread" isn't more
than three cents for a stock ETF and five cents for a bond ETF. The spread is
the difference between the highest price that a buyer will pay and the lowest
price at which a seller will sell. A large spread can quickly erase the cost
advantage of a low expense ratio.
Actively managed mutual
funds tend to carry higher costs than index funds, but investors in active
funds also should be careful to limit fees.
Generally, investors shouldn't
pay an annual fee of more than 1.25% for U.S. large-company stock funds, more
than 1.75% for U.S. small-company stock funds or more than 1.5% for U.S. bond
funds, he says. The higher the manager's fee, the harder it will be to beat an
index fund, and most managers fail to do so consistently.
To see a mutual fund's
expense ratio and how it compares to the average, look up the fund at
Morningstar.com and click on the "Expense" tab.
Buying a Home
Home buyers face some
fees that typically can't be lowered, such as the fee for a home appraisal.
But they can save
thousands of dollars by comparing and negotiating lender fees. And in some
cases, paying higher lender fees can actually save money in the long run, if it
helps secure a lower interest rate on the mortgage.
Lender fees, also called
origination fees, often range from 0% to 1% of the total mortgage amount, says
Keith Gumbinger, vice president of mortgage-info website HSH.com.
If a lender isn't charging an
origination fee, mortgage applicants should ask for a list of other charges
they will likely have to pay at the closing table. Those other charges could
more than offset any savings on the origination fee.
In addition, lenders
sometimes charge higher fees but offer lower interest rates. That can be a
worthwhile trade-off for a borrower who plans to stay in the home for a while.
For example, borrowers
who take out a $400,000, 30-year mortgage at a 4.25% fixed interest rate and
pay 1%, or $4,000, in fees would need to keep the mortgage for more than 49
months to save money compared with borrowers who pay 4.5% in interest and pay
Over 30 years, the
savings would amount to more than $17,000, after taking into account the $4,000
To do the math yourself
on a fixed-rate loan with an origination fee, consider using a mortgage
"amortization" calculator, which breaks out the portion of each
monthly payment that goes toward interest charges and the portion that pays
down principal. Amortization calculators are available on HSH.com and
Sean Agrawal, a marketing
executive, recently purchased a three-bedroom condominium in New York's Long
Island. He chose to take out a $417,000, 30-year mortgage with a fixed interest
rate of 2.75% for 10 years, and pay more than $11,000 in closing costs.
He says that option made
more financial sense than another mortgage he was offered that carried a higher
interest rate, and would have resulted in just $1,000 in closing costs. "I
had to look at the big picture," he says.
But be careful: A higher
fee may not always result in a lower mortgage rate. In the Los Angeles area,
for example, the lowest rate on a $400,000, 30-year, fixed-rate mortgage
without an origination fee was recently 4.13%. Buyers who paid a 1% fee
couldn't do any better, according to a survey of lenders by HSH.com.
Many buyers also pay an
optional upfront fee to lower the interest rate on their mortgage. Instead,
they should find out if they can get the same or a lower rate with another
lender at no additional cost by searching mortgage-comparison sites like
Bankrate.com and LendingTree.com.
for the original article in the Wall Street Journal.