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Investing/Expenses/Types of Expenses

Types of Investment Expense

The financial service industry has an incredible number of expenses that can be deducted from your investment accounts. The expenses fall into three general categories:

  • Fees
  • Commissions
  • Transaction Charges

Fees

There are three types of fees: Hourly, Fixed, and Asset-Based (% of assets). The type of fee is usually based on the types of services that are being provided by Wall Street. For example, professionals charge hourly or fixed fees for their planning services. They charge asset-based fees for investment advisory, money management, and custodial services. 

Asset-based is the most popular type of fee because it automatically increases with the value of your assets. For example, a 1% on $500,000 is $5,000 per year. A 1% on $1,000,000 is $10,000 per year.

Commissions

Wall Street salesmen are paid commissions to sell investment (mutual funds) and insurance (annuities, life) products. Commissions are deducted from your accounts if the advisor is compensated with a front-end load. Load is another word for commission.

There are also back-end loads. Salesmen are paid commissions by they product companies (mutual fund family, insurance company). The companies charge higher fees to get back the commissions they paid the sales reps and they lock you in for seven years with sales penalties for early withdrawal.

Transaction Charges

Some firms bill transaction charges every time you buy or sell a security or other type of investment. This creates a variable expense based on the turnover rate (buys, sells) in your portfolio. Low turnover might be 25% of the market value of your assets. High turnover might be 75% of the market value of your assets.

Transaction charges are going away at a lot of Wall Street firms. They are being replaced by asset-based fees that cover a fixed number of annual transactions. There is a transaction fee if your buys and sells exceed that number.

Paladin says.....

You should compensate financial professionals and firms with fees. This expense covers the cost of services that help you achieve your financial goals. Advisors and firms should be required to justify the fees they charge by documenting the value of the services you receive for the expenses you are paying.    

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