Investing Fees

This discussion focuses on ways to reduce transaction fees or commissions. These fees may be fixed fees per trade such as $4.99/trade or a percentage of invested amount such as 0.25% of investment amount or assets under management.  

Finally…Commission-Free Trades

More competition and innovation has forced the market to offer the trader the $0/trade option. These trades are also known as commission-free trades. Robinhood is one example that helped pave the way to free trades and most of the other big names have followed suit rather than risk the alternative.

This is great for traders especially high volume traders. However, brokers still make money and find innovative ways to redefine their revenue streams. Not all types of trades qualify to be commission free. Be wary of exceptions such as OTC stocks, IPO’s, time limits, and other possible disqualifiers that vary by broker.

Review your broker statements

These are a very detailed, sometimes confusing, summary of balances and incoming revenues such as divendeds, interest, sales, and expenses such as borrowing interest, losses, and fees. They typically cover a monthly or annual time period. You’ll be able to spot these fees and learn from them. Within some 401(k) accounts there are also fees that could be applied if reallocating money among account too frequently.

Minimums

Some investment require a minimum investment amount. Some can be several thousands or more. In other words, a particular investment could require $10,000 investment to participate.

Minimums are generally designed to make it worth the time for the advisors and managers of the investment. The minimums can affect the other fees. If you can commit a higher initial investment amount, you may have more leverage in negotiating others fees downward. 

Transaction Fees

OTC fees

For most firms trades for over-the-counter stocks still have fees. They may be fixed or percentage based. 

Regulatory Fees

Also watch for a small fee called a “regulatory fee” on some stocks. These are costs to cover regulatory oversight of the brokerage industry. These fees may also be called and”estimated fee”, “additional fee” or “transaction fee”. These are normally SEC and FINRA imposed fees. 

Initial Public Offering (IPO) Fees

If your interest is in IPO’s there may be a fee associated. 

Borrowing Interest Fees

If you don’t have sufficient cash in your account and you’re trading on margin you’re probably facing a hefty monthly interest fee on that “borrowed” money. This percentage of fees could easilty outweigh a small gain in stock appreciation. 

Other Fees

There are so many investment types but those that involve creating an account such as an IRA or Roth IRA, will likely have termination fees as well. With so many types of fees it’s advised to ask your broker for a list of all the fees, explanations, and formulas used to calculate those fees. From there, you can challenge them or ask the broker to absorb some or all.

You may have negotiation room especially if you have a larger investment amount. Pose the question, it doesn’t hurt to ask about any concessions if you were to bring a large investment amount to the table. 

Hiring a Financial Advisor

There are a few critical decisions made in a lifetime and hiring someone to put your money to work is probably one of them. Some take the bull by the horns and try to invest themselves and others give the wheel to an advisor or both. 

Change may not be easy

You can change your advisor if you’re unhappy but some investments have time committments within them meaning you may change advisors but an investment that was done with that advisor may be locked up for a duration of time.

Hiring an advisor doesn’t guarantee any type of result but they can provide advice on investment options that are available to best meet your financial goals. Their experience and education is intended to give you a good chance at making the most out of your money, which even means minimizing losses during bear markets. But this advice comes at price where as you could attempt this yourself for less and take the risk that you can do as well or better than an advisor. They can be expensive and more so, if they have a strong reputation. There are various ways they make money and those are discussed later. 

This message isn’t to promote or not promote hiring a Financial Advisor but will discuss ways to help choosing the right advisor. There are a few types and designation for “Financial Advisors”. One is an “Investment Advisor”,  a “Financial Planner”, and “Wealth Manager”. The terms “advisors” is generic, many specialize in an area such as investment, insurance, taxes, and others. A Wealth Manager may specialize in financial planning for those with significant net worth. 

Investment Advisor

This is someone who helps you primarily with your investments but they may not be involved in the creation and execution of your overall financial plan for the short or long term. 

They manage investments, which could be a component of a financial plan, but don’t necessarily provide input on other savings goals, tax strategies, estates, trusts, wills, insurance, or retirement goals.

An investment advisor will help you determine your risk tolerance, asset allocation, and other investment advisory areas specific to your investments. 

Financial Planner

This is someone who helps prepare an overall financial plan, which could incorporate an array of strategies, to meet your short or long term financial goals. Certified Financial Planners (CFP) can be expensive but they are highly educated, trained, and held to a high standard of ethics. The certification process is managed by the Certified Financial Planner Board of Standards.  Visit the CPA Board and NAPFA to search for Financial Planners. 

A CFP can help define a financial plan that incorporates aspects of investments, insurance, estate, risk, and retirement. But look one step further, find a CFP that is a Certified Public or Tax Accountant so you can have one person to talk to about all financial scenarios and minimize your tax burden. If your financial planner, whether it’s a CFP or not, is not familiar with tax implications then you’ll need to find another person to consult (more time and money).

CFP’s, or any Financial Planners, make money in similar ways as Investment Advisors. Some are fee only and others have affiliations with business from which they are compensated or a combination. You should ask how your CFP makes money to help understand if they are pushing products for their benefit more than yours. You can search for fee only Financial Advisors the NAPFA.

Investment Advisor Fees

Investment Advisor Fees

Keep in mind whether your investments or financial plan works out the way you hoped, you will still likely pay fees. Some would think these fees should be correlated to increase in investment value (you scratch my back, I’ll scratch yours). You should only pay the advisor after, and if, they make money for you…right? That’s not normally the way it works. Couple reasons are there is considerable upfront work involved and investment results are generally unpredictable.

Since you’re going to pay fees, your investments need to make up those fees (or prevent you from losing as much money as if you didn’t use an advisor) just to break-even.

There following list are the general methods an advisor is paid and you should ask (among other questions) exactly how they are paid to keep them honest and determine if there is a conflict of interest or bias that may not be in your best interest. 

  • Flat fee – fixed price based on an agreed upon scope of work.
  • Hourly rate – billing based on hours of work servicing your account.
  • % of managed asset values – such as 0.50% annually on the amount of your assets they are managing.
  • Commission – the advisor is paid for products they sell you from other companies. The benefit for you is there is no cost; however, this raises a caution flag regarding the advisor’s best interest. Ensure your advisor is a fiduciary which is a person that is has a duty to act in your best interest. Be skeptical if your advisor promotes products from which they receive a commision. 
  • Combination of the above. 

Most financial advisors with a fiduciary duty are fee-based being one or a combination of the top three bullets.

 

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The IRS has a 10 minute quiz to help determine whether you may be able to claim a Tax Education Credit. This will help you determine if you're eligible for certain educational credits or deductions including the American Opportunity Credit, the Lifetime Learning...

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