Various Fees on Investor Accounts Can Add Up
Mutual funds have grown popular in recent years because they make investing accessible and affordable for people with small amounts of cash.
So it’s somewhat ironic that many fund companies levy miscellaneous fees directed at investors with small-dollar balances or those who make use of certain types of services.
Suppose you want to open an Individual Retirement Account. Doing so will likely cost you $10 to $15 a year at most fund companies and as much as $60 or so at a few. Some groups impose separate IRA fees each time you open or close an account, and for each year you maintain one.
Or perhaps you want to redeem shares by bank wire. Several companies will nick you $10 or $15 each time you do so. A handful of firms might even ding you $5 or more merely to switch funds over the telephone.
Then there are fees simply to open an account or to maintain accounts with small balances. Plus, some firms levy redemption fees to discourage frequent trading.
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None of these miscellaneous fees shows up in a fund’s “expense ratio,” the standardized cost-comparison measure that all funds must list prominently in their prospectus disclosure documents. They aren’t reflected in a fund’s performance numbers, either.
Miscellaneous fees, including redemption charges, shouldn’t be confused with any applicable “loads” or sales charges, the main purpose of which is to compensate the broker or financial planner who sold you a mutual fund.
Yet miscellaneous fees can exceed loads or operating expenses in some cases.
Suppose you have less than $500 in the Bull & Bear Special Equities Fund. The $5-a-month low-balance fee imposed by the New York fund can quickly eat up a large chunk of your account. So can a $5 monthly fee on accounts below $1,000 charged by the Reserve Funds of New York, or the $3 monthly fee levied by the GIT funds of Arlington, Va., on balances below $700.
Mark Kawakami, a Fidelity Investments shareholder in Glendale isn’t thrilled about the $12 maintenance fee that goes into effect Nov. 10 on Fidelity accounts showing a balance of less than $2,500 per mutual fund (investors with more than $50,000 in total holdings at Fidelity won’t face this charge).
“I’m looking at seven different charges at $12 each,” says Kawakami, who runs an advertising/graphics design firm.
“This will cause people to consolidate their mutual fund positions, which might not be a prudent investment decision,” he complains.
Yet account consolidations are a big reason behind the new fee policy. Fidelity spokesperson Teri Kilduff notes that small fund accounts are relatively costly to maintain.
Some 19% of Fidelity accounts were below the $2,500 threshold at the time the company announced the new policy earlier this year and a significant number have since been consolidated, she says.
Even the Vanguard Group, generally recognized as the low-cost leader in the fund business, penalizes investors in a few situations for being small.
For starters, Vanguard imposes a rather high $3,000 investment minimum on most of its funds to keep the smallest buyers away. In addition, the firm charges a $10 annual maintenance fee in certain index portfolios on accounts below $10,000.
And the firm imposes a fee of 2% when investors buy and 1% when they redeem shares in Vanguard’s emerging-markets index portfolio, reflecting the higher costs the fund incurs to trade stocks in developing nations. All that’s in addition to the $10 maintenance fee.
Several fund groups charge redemption fees of 1% or 2% to discourage investors from buying and selling frequently--a practice that can run up the trading costs borne by other shareholders.
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Redemption fees don’t fit everybody’s definition of an onerous charge, since the money collected usually goes back into the fund for the benefit of remaining shareholders. Still, they are costs that investors will need to bear.
Douglas Fabian, editor of the “Fabian Investment Resource” newsletter based in Huntington Beach predicts redemption fees could become more common during the next bear market, when fund companies will be tempted to resort to various maneuvers to retain shareholder dollars. He considers 1% to be the cutoff between a reasonable and onerous redemption charge.
Perhaps the most frustrating aspect of miscellaneous charges is that they aren’t levied uniformly. A fund group might impose hefty fees in one or two areas and nothing somewhere else. That’s why it pays to check the prospectus or call the shareholder-service representatives of funds in which you’re interested.
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Miscellaneous Fees Can Multiply
Many mutual fund companies levy various types of shareholder-borne fees that don’t show up either as sales charges (loads) or operating expenses. Here are several fees of which you should be aware:
* Account maintenance fee: A charge imposed on low-balance accounts to reflect the proportionately higher costs to service small investors. Can range from about $10 a year on up. A “low balance” can vary from a few hundred dollars to several thousand.
* IRA maintenance fee: Imposed yearly on individual retirement accounts. Typically run about $10 a year but can go several times higher. Some firms also charge $10 or more to set up an IRA or close one. Many firms also charge higher fees to establish and maintain Keogh accounts.
* Redemption fee: A levy imposed to discourage short-term trading by shareholders, which can be costly because it requires the fund manager to sell stocks or bonds more frequently. These fees run up to 2% or so and often phase out within a few months.
* Telephone redemption fee: A charge to sell shares at that day’s price over the phone (as opposed to through a letter). The fees run between about $5 and $15.
* Wire redemption fee: A charge, typically between $5 and $15, to wire proceeds from the sale of fund shares directly to your bank.
