ABOUT 140 years ago, a Philadelphia retailer named John Wanamaker figured his customers and salesmen had better things to do than spend hours haggling. His invention: assigning one price, "plainly marked", to every product.
The price tag caught on nearly everywhere, with one major exception: financial services. Investors still have a surprisingly difficult time figuring out what they'll pay for financial advice, mutual funds and retirement plans.
A fee that eats up one per cent of assets each year might not seem like much - except that the charge bleeds assets from your account year after year.
Say you invest US$10,000 and earn 5 per cent per year. That one per cent fee will cost you a total of US$1,487 after 10 years and US$4,622 after 20 years.
To help you figure out if you're paying too much, this guide details the typical costs of various investment products and services. If you are overpaying, try to negotiate a new rate. Think of it as an instant investment return.
Actively managed mutual funds
What they cost: On average, investors pay 0.65 per cent of the value of the fund per year for bond funds and 0.89 per cent for equity funds.
Why: With actively managed funds, you're paying a fund company to get access to its investment professionals.
The numbers above reflect what the average investor pays in expense ratios, according to the Investment Company Institute (ICI).
An expense ratio is the cost compared to the value of the assets in the fund - for bond funds, investors pay US$65 for every US$10,000.
The average fund charges much more, but most investment dollars favour less expensive options. The cheapest 25 per cent of equity funds held 73 per cent of assets at the end of 2013.
The priciest mutual funds are so-called "alternative" funds, which have an average asset-weighted expense ratio of 1.35 per cent per year, according to the ICI.
Alternative funds buy up commodities or other assets that, in theory, will perform differently from stock or bond markets and so provide a hedge.
Index mutual funds
What they cost: On average, 0.12 per cent of assets per year for equity funds and 0.11 per cent for bond funds.
Why: Index funds are so much cheaper because they dispense with hiring a professional to manage the portfolios.
Instead of trying to "beat the market" with individual stock picks - which most managers can't do consistently anyway - index funds invest in a set, broad range of bonds or stocks, such as the Standard & Poor's 500 Index and the Barclays US Aggregate Bond Index.
One extra cost for all mutual funds, both active and index, is transaction costs.
These costs are largely invisible to investors, but they can take a big bite out of returns depending on how often managers buy and sell holdings and which assets they're buying.
Large-cap value funds may lose less than one per cent per year to trading costs, a 2013 study found, while small-cap growth funds can lose more than 3 per cent.
What they cost: 0.5 per cent of assets (average expense ratio for US non-leveraged exchange-traded funds or ETFs).
Why: The vast majority of ETFs invest based on an index, which keeps their costs similar to those of index mutual funds.
The average ETF expense ratio is increased by new actively managed ETFs coming on the market, as well as specialty ETFs such as commodity funds. They can have expense ratios of 1.5 per cent.
ETFs trade on an exchange all day, unlike mutual funds, whose net asset value is calculated at the end of the trading day.
That means one additional cost of ETFs can come from trading activity. Investors must trade carefully to get fair prices, especially in less liquid ETFs.
401(k) plans are a supplementary pension scheme in the United States where an employee contributes part of his or her paycheck, sometimes matched proportionately by an employer, into an account where monies can be invested.
Taxes are not paid until the money is taken out. Early withdrawal carries a penalty.
The closest equivalent in Singapore is the Supplementary Retirement Scheme.
Singaporeans can also invest their Central Provident Fund (CPF) monies in funds approved by the CPF Board. Under recent changes aimed at lowering fees, total fees paid on newly approved funds, from this month, vary from a maximum of 0.35 per cent on lower-risk funds, to a maximum of 1.75 per cent for higher-risk funds. Older funds have until 2016 to make the changes)
What they cost: Total fees on 401(k) retirement plans average 0.35 per cent of assets for plans with more than US$1 billion in assets, according to Brightscope. Plans with less than US$50 million have average fees of 0.94 per cent.
Why: Employees are charged for two services. First, there's the cost of running the plan - administrative expenses, paperwork, marketing, mailings.
Second, there are the costs of managing investments, usually through mutual funds.
Those account for about 85 per cent of 401(k) fees, BrightScope estimates. Small plans pay more overall because they have less bargaining power and fewer participants to cover fixed costs.
Administrative costs aren't always spread evenly among employees. That's because investors who choose low-fee index funds often avoid "revenue-sharing" fees. Those charges are included in pricier funds' expense ratios but actually help cover the retirement plan's administrative costs.
What they cost: Most clients with more than US$100,000 pay less than 1.25 per cent of assets per year in account management fees, according to Cerulli Associates. But fees vary widely, exceeding 2 per cent for some less-affluent investors. Of those with just US$100,000 in assets, a quarter pay more than 1.5 per cent per year.
Why: Financial service providers go by many names - fee-only planners, financial advisers, wealth managers, family offices, private client groups, bank trusts.
The basic business model is the same: Provide investment and other financial advice, usually for an annual charge based on the size of assets being managed. The wealthier you are, the less you tend to spend for advice, at least as a percentage of your fortune.
Of clients with more than US$10 million in assets, Cerulli Associates estimates, two thirds pay less than 0.75 per cent per year.
What they cost: Flat service charges of US$5 to US$10 for stock and ETF trades; up to 5 per cent front-end sales loads on fund purchases.
Why: When you buy stocks or funds directly from a brokerage, your costs can vary widely. Discount brokerages often charge a flat fee for each transaction. For example, Charles Schwab charges a US$9 commission for each online stock or ETF purchase and an extra US$25 if you get help from a broker.
Other traditional brokers may charge much more, with commissions to pay the broker built into fees or expense ratios of the products they sell. For example, a mutual fund company may charge a fund buyer a recurring "12b-1" fee (which increases the expense ratio) or a one-time "sales load". Both are used to compensate the seller of the fund. A typical sales load on a share purchase of less than US$25,000 is 5 per cent, according to the Financial Industry Regulatory Authority. Purchases of US$1 million or more usually avoid such charges entirely. Such load funds are rapidly losing popularity to no-load varieties.
In Singapore, most brokerages charge a minimum of S$25 per online trade of Singapore stocks - more expensive than their US counterparts. Charges scale up the bigger the investment. Broker-assisted trades usually charge more.
Real estate investments
What they cost: 6 to 7 per cent in total transaction costs.
Why: Add up all the costs of buying a piece of real estate - brokers, attorneys, paperwork - and the total can reach 6 to 7 per cent of the property's value. Of course, almost everything is negotiable, including broker fees.
Also, rather than buy real estate themselves, investors can buy funds that buy real estate. Mutual funds that specialize in real estate investment trusts (Reits) have expense ratios that vary from less than 0.5 per cent for index funds to as much as 3 per cent for the priciest actively managed options. The median real estate fund costs 1.03 per cent. However, beware of private, non-traded Reits, which often impose extra fees on individual investors.
Due to cooling measures imposed on Singapore property, residential property transactions can incur hefty stamp duty charges of 10 per cent or more, especially if the property is not the buyer's first.
What they cost: An annual management fee of about 1.5 per cent of assets, along with 18 per cent or so of any investment gains.
Why: Though recent underperformance has caused some investors to think twice about whether hedge funds are worth it, many wealthy investors and institutions still rely on them to diversify portfolios.
The conventional wisdom is that hedge funds charge "two and 20" - 2 per cent of all assets and 20 per cent of any gains.
But data from Hedge Fund Research show investors pay slightly lower fees depending on the fund's strategy. Relative value funds charge an average of 1.45 per cent in management fees, while macro funds charge 1.62 per cent. The incentive fees, which come out of investment gains, also vary, from 16.4 per cent for relative value to more than 19 per cent for event-driven funds. BLOOMBERG
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