Types of Expenses and Fees


It is important to understand the types of fees and expenses associated with your investments, so that you can make the right investment choices for you…and decide if what you are paying is reasonable for the services you receive. With mutual funds, fees pay for professional management, account recordkeeping and investment advice, and other basic services to run the mutual fund.  Some fees are paid from the fund’s assets, some are paid directly by the investor, and some are deducted only for certain services or circumstances.

Before choosing an investment, read the prospectus which outlines the fees and expenses associated with it.

Operating Expenses

These expenses are paid from a mutual fund’s assets. There are three types of operating expenses.

  • Management Fees cover the costs to manage the investment portfolio and administrative expenses, and all funds have these charges. Fees usually range from 0.5% to 1% of the fund's total asset value and are often higher for specialized funds. They are reflected in the fund’s share price and are not directly charged to the investor.

  • Other Expenses include legal, accounting, custodial and recordkeeping expenses.

  • Distribution Fees, called 12b-1 fees, are marketing expenses to distribute the fund. Not all mutual funds have 12b-1 fees. For a fund to be called "no-load" its 12b-1 fee must not exceed 0.25% of assets.

Exchange-traded funds (ETFs) are similar to mutual funds except they trade like stocks. ETFs can be relatively inexpensive, but there are costs involved such as commissions to trade them, operating expenses while holding them, and changes in discounts and premiums to the fund’s net asset value (NAV).


The Active/Passive Discussion


Combining active and passive strategies is a way to achieve another dimension of diversification within a portfolio. The conversation around active and passive strategies is not an either/or proposition as both can and do have a place. There is a role for both and reviewing the attributes of each can help construct a portfolio that serves your best interest. Know the reasons to consider and use both passive and active options as complements in a portfolio, depending upon market conditions and investor objectives.

Passive products allow investors a quick and cost effective to get exposure to asset classes. Active products provide opportunities for managers to find information asymmetries and manage risk. Passive and active strategies should be considered for their merits in the pursuit of your portfolio goal and to reduce adverse effects. Keep in mind it is not just about returns as more complex strategies may provide the opportunity to produce superior investor outcomes

Portfolios that include both passive and active options can be highly complementary, offering the opportunity for results in excess of indexing along and/or for navigating market risks more effectively.


Expense Ratio


Every fund has an expense ratio, which shows how much of a fund’s assets are used for expenses. Shown as a percentage of assets deducted annually for expenses, this is an important barometer of what you will be paying and how that might affect your earnings. You will find the expense ratio listed in the fund’s prospectus. Naturally, the goal would be to look for a fund with a low expense ratio, but keep in mind that certain funds have expense ratios that reflect costs to operate a certain type of fund, its size or objectives.

Some fees, called shareholder fees and transaction fees are paid directly by the investor and not reflected in an expense ratio.

Shareholder Fees

  • Sales charges, or “loads” pay for the services brokers and advisors provide their clients and are associated with “load funds”.

  • Account fees may include purchase fees, redemption fees, or exchange fees. An account fee may be charged for maintenance for the account, especially when it falls below a certain dollar amount.

It is important to minimize fees relative to the services you receive. Evaluate a fund’s objectives, past performance and other service advantages to determine if the fees paid are reasonable. For example, an index fund is “passively managed”, designed to track a market index and does not conduct individual security analysis. This results in low fees. An actively managed fund attempts to return more than its benchmark index, and charges higher fees for that expertise and security selection.

When paying a financial advisor, you should evaluate if the fee you pay the advisor meets the value you receive from their advice. These fees are often paid through sales charges, a percent of assets called a wrap fee, or a flat fee.


Sales Charges and Share Classes


Different types of funds, or share classes, have different costs, often based on the services bundled with the fund. Sales fees compensate an investment advisor for the advice they provide a client.  There may also be other classes of shares than those shown here with different combinations of fees. Review a fund’s prospectus for all fee details.

No-load funds

No-load funds are offered for sale without sales fees, or sales loads. This class of fund is sold directly to individual investors and generally does not include investment advice.  Note: for a fund to be called "no-load" its 12b-1 fee must not exceed 0.25% of assets.

A Shares

These front-end load funds are offered through brokers, include advice and are sold with a sales charge, usually 3-6%, which is deducted from your initial investment. (The maximum sales load is typically 8.5%). This fee typically goes to the broker selling the fund. These shares can also  include a 12b-1, usually 0.25%, deducted from the fund's assets each year.

B Shares

These back-end load funds are sold without a sales charge, but they include advice and carry a redemption fee, which declines every year until it disappears, usually after six years. This load is called a CDSC or contingent deferred sales charge and it goes to the broker selling the fund. If an investor holds a fund longer than the specified time, say 6 years, it disappears. B shares can also carry a 12b-1 distribution fee which is typically higher than the 12b-1 fee of A shares.

C Shares

These "level-load" shares include advice, but no sales charge at purchase. They may have a small 1% redemption fee in effect for the first year of ownership, or other specified time period. They can carry a 12b-1 distribution fee, which you pay for as long as you hold the fund.