Mutual Fund Brokerage Costs And Fees

You hear a lot of talk about the benefits of a mutual fund. But for those who are new to investing they are a bit in the dark as to what they are and how they work. They rely on the broker to give them good solid advice. If the broker they have chosen is less than scrupulous, they can get in over their heads on an investment that has very little payoff for the investor. The problem is that they end up spending more of the profit on brokerage costs and fees than deposits to their bank accounts.

What is a mutual fund?
Basically it is an investment scheme that gets people to pool their money to buy stocks, bonds and other short term money market ventures. The mutual fund is set up so that the fund manager makes the decisions on what to buy, trade or sell. The members are paid a dividend on their investments from any profits made from the investments.

What does it cost?
This is not to say that investing in a mutual fund is a bad thing, but the costs seem to be the biggest problem. The cost of being involved in a mutual fund can eat up the profits you make before you even see them. The cost is also part of the reason a lot of them have a below par performance rate.

The really unnerving part of it all is that there are fees and costs hidden in the verbiage of the agreement that investors don't even know about until it's too late. The reason that most companies can get away with this is that most investors are unaware of what it is they are paying for and how much it should really cost them.

What are normal fees?

The fees are generally broken down into two categories
A)The fees that you pay yearly for being a member in the mutual fund
B)The fees charged for buying and selling. These transaction fees are called loads.

One thing a new investor should understand that the load on a mutual fund can be so great that it makes it an unwise investment. To break it down further expenses in point (A) consist of the cost of the fund manager and this is usually set at 0.5 to 1% of the average value of the combined assets. This may sound like very little and on the surface it is. But this small percentage makes certain that the fund manager is very highly paid and this is off the top. A small mutual fund could easily be over 2.5mil. Think about 1% of that and you see why fund managers do what they do. Of course they have to be paid but just because the manager is one who charges at the high end of the range doesn't necessarily mean that the person will do a super job of managing the fund.

Next consider that you also have to include in your expanse ration the administrative cost. This includes charges for postage, bookkeeping, the espresso machine and the receptionist. The more frills the office has, means more of your dollars are going to pay for things you really get no benefit from.

In the USA there is one thing that an investor can add into their expense ratio. It is an ongoing fee for advertising and promotion of the mutual fund. Yes you foot the bill for all the commercials and other types of advertising. Your expenses for just being an investor could be as high as 2%, this is especially true for index funds. This is the only country that actually mandates brokerage costs and fees.

It may be that you are thinking that it could really be worth it. After all it is usually true that you get what you are willing to pay for. The studies have shown that there isn't any truth to that in this case. The funds with the highest expense ratios are not always the ones that give a high return to its investors. It seems with most of them that the only one who really makes any money is the fund manager.

What can you do?

For starters if you really want to get the most for your dollar you need to educate yourself in this area of investment. Learn all you can about ETF's, options, stocks and of course mutual funds the next thing you need is a good trading platform.

There are options online for trading without the expense of a broker. When shopping online for a trading platform you want to find one that offers free ETF and stock trading. One that does not require that you keep a minimum in an account and also one that can give you quotes that are up to the minute and in real time.

By using a platform like this you can take all the money you would have been given to mutual fund manager and invest it for your own benefit. It's your money and your future why not be the one who makes the decisions on how it's spent. Brokerage costs and fees can keep you from realizing your retirement dreams.