Take control: Understanding investing fees

Dismal market performance in 2008 has many investors thinking about a new investment strategy for the coming year - a key element of which should be to slash investment fees.

In such a bleak stock market, it's likely your goal was to protect what you had by minimizing losses rather than posting any significant gains. Broader market forces pressured most investments downward.

"When you come off a frustrating year like last year, investors are looking around for answers," said Christine Benz, director of personal finance for Morningstar Inc. "One of the most obvious things you can do is focus on what you can control and I put fund fees squarely in the column of something you can control."

So whether you are a fund investor or manage your own stock portfolio, managing your investment fees should be a part of your overall strategy.

MUTUAL FUND INVESTORS

Regulatory changes regarding mutual fund fee disclosures are being debated in Washington, D.C. That's because while some mutual fund fees are easy to identify, others may take a little more digging to uncover, Benz said.

Here are some fees and expenses you'll want to look for as you develop investment plans for 2009:

1. Expense Ratio. This is the most transparent mutual fund fee. It represents the percent of fund assets used to pay for expenses - including administrative and operational costs and, of course, salaries for the management team. As a rule of thumb, Benz says you should look for large diversified funds that charge less than 1 percent per year. While you should expect that some smaller specialized funds will charge more than 2 percent.

If you're selecting funds in your 401(k) plan at work, keep in mind that index funds will have a lower fee structure than actively-managed funds.

Dana Anspach, a principal with Scottsdale Ariz.-based Wealth Management Solutions said investors should also avoid the temptation to move 401(k) money around frequently. That's because they might incur short-term trading fees, which often are added for funds owned less than 90 days.

"In down markets people sometimes feel the need to move money around because it gives them a sense of control," she said. "Making a decision to not take action could be the right thing to do."

2. 12b-1 fees. Promotion, marketing and distribution fees known as 12b-1 fees are part of the expense ratio, but you can find this amount broken out separately. The conventional industry fee is 25 basis points (0.25 percent). The generally range can range from 0.25 to 1 percent.

3. Fund trading costs. This is a fee that requires some digging. It represents the amount of brokerage fees your fund managers pay to trade securities. It's typically listed as a dollar amount but some funds are beginning to show it as a percentage of net assets, similar to an expense ratio, making it easier to compare funds.

To find this figure you'll need to look at a supplement to your fund's prospectus called the statement of additional information.

4. Additional fees. The Securities and Exchange Commission offers advice about where to look for mutual fund fee information at http://www.sec.gov/answers/mffees.htm#purchase.

Most fee information can be found in the fund's prospectus under the heading "Shareholder Fees." There, you'll find information about sales, purchase, redemption, exchange and account fees.

Several organizations offer tools to compare the costs between funds. The Financial Industry Regulatory Authority, a non-governmental regulator for securities companies offers one at http://apps.finra.org/fundanalyzer/1/fa.aspx

STOCK INVESTORS

If you're an online trader, you'll want to look deeper than the stock commission that's advertised by many discount brokers. At least you'll want to carefully read what qualifies you for the rate cited in the banner headline.

For instances at Zecco.com, a balance of $2,500 entitles you to 10 free trades every month. The fee for Internet trades at TD Ameritrade is $9.99, a flat rate whether it's 1,000 or 10,000 shares.

Commissions may only be the beginning of what you actually pay for trading online, however.

Here are some of the additional fees to watch out for:

1. Inactivity Fees. Customers who don't trade frequently may be charged a fee so the account is generating revenue for the brokerage.

2. IRA closing fees and account transfer fees. Some companies don't want you to take your money elsewhere and charge you to close your IRA account or transfer money from your trading account to another company.

3. Alternative trades. Fees for paper confirmations or to trade by methods other than the Internet. These fees can add up if you want paper documentation or if you choose to make a trade by telephone or through a broker.

4. Large trade fees. The volume of trading may influence what you pay. Some online companies will charge more if you exceed a certain threshold such as 1,000 shares or 5,000 shares.

As a general matter, online traders should consider consolidating accounts to save money. Consider that multiple accounts that fall below any minimum balance thresholds can quickly trigger a slew of avoidable fees.

Of course, success in 2009 won't be all about fees. When you're setting your investment strategy, Morningstar's Benz cautions that many investors are going into the new year with their assets parked in safe investments. That strategy is likely to leave them unprepared to take advantage of a market recovery.

"That's a mistake I see investors making again and again. They use the rear view mirror to drive the car," she said. "They're looking back on a terrible year in which only long-term treasuries did very well. The risk right now is investors have overly conservatively positioned portfolios."