Over the past decade, investors have grown increasingly aware of and averse to fees in their portfolios.
Historically, investors often had little sense of the fees they paid. Money managers buried them in fine print on portfolio performance statements. Even for investors who understood the fees they were paying, few low-cost alternatives existed.
That’s all changed. Zero-commission brokerages have become the norm since October 2019, when Charles Schwab eliminated all transaction commissions and competitors like TD Ameritrade and eTrade followed suit. The rise of online brokerages has forced the entire investing world to become far more transparent and competitive.
Commissions aren’t the only fees to come under fire. Fund expense ratios have seen downward pressure, with some fund managers going as far as 0% expense ratios.
Still, 4 out of 10 investors don’t know how much they’re paying in fees, according to a study by Consumer Reports. Among investors who did know how much they’re paying, many were unhappy with the fees, commissions, expense ratios, and other costs that plagued their returns.
As you aim to bolster returns while keeping expenses low, here are 11 ways to minimize your investing costs and keep more of your earnings hard at work compounding for you.
Ways to Reduce Fees & Costs in Your Investment Portfolio
1. Start With a Commission-Free Brokerage
Choose an online brokerage that doesn’t charge commissions for stock or fund trades. It’s a no-brainer.
A commission is a transaction fee charged by the broker every time you buy or sell a stock, exchange-traded fund (ETF), mutual fund, or other paper asset. These fees add up quickly. If you buy shares in 10 funds per month to spread your investments, and your brokerage account charges a $7 commission, that’s $70 every month lost in the blink of an eye. Over a year, that comes to $840 in commissions alone.
I use Charles Schwab as my brokerage. They led the charge on eliminating commissions, and I’m generally happy with their platform and service. Alternatives include TD Ameritrade, Robinhood, M1 Finance, and eTrade, all of which have also eliminated commissions for online trades.
Keep in mind that your broker doesn’t just hold your taxable brokerage account, but also your IRA or Roth IRA. By choosing a broker that doesn’t charge commissions, your retirement investments can grow commission-free as well as tax-free.
2. Choose Free Bank Accounts
Beyond your brokerage account for investing, you also need a checking account and likely a savings account or two.
A checking account affords you a debit card for day-to-day expenses and serves as a liquid operating account. Your savings account holds your emergency fund and goal-specific savings, such as a down payment for a home or a travel fund.
All too often, banks charge monthly maintenance fees for these accounts. They placate you by telling you it doesn’t matter because they waive these fees as long as you maintain a certain minimum balance.
Don’t play that game. In today’s financial world, you have your pick of reputable free checking accounts. Choose one that fits your needs, and find a savings account that’s not only free, but pays you high interest for the privilege of holding your money.
Note that you don’t need to open both at the same financial institution. One way to minimize the temptation to dip into your savings for nonessentials is to keep your savings at a different bank, where you won’t see the balance every time you log into your checking account’s online banking platform.
3. Pick a Low-Cost HSA
Not all health savings accounts (HSAs) are created equal.
Some charge a percentage of assets under management. Others charge a flat monthly fee. Some charge account opening or closing fees. And a few like Lively charge no ongoing fees or waive the fee if you maintain a minimum balance.
With HSAs, you don’t always get what you pay for. Some of the best, most flexible HSAs charge surprisingly little. These accounts offer unique tax advantages, allowing you to deduct contributions in the year they’re made, your earnings to grow tax-free, and you to withdraw money tax-free.
Carefully research the best HSA accounts on the market before choosing one, and take advantage of their triple tax protection to build wealth outside of Uncle Sam’s far reach.
4. Invest in Low-Cost Index Funds
The strategy of investing in low-cost, passively managed index funds that mirror major stock indexes was popularized by Vanguard founder Jack Bogle. His theory was simple: Few actively managed mutual funds beat the market indexes, and among the few that do, many still result in lower returns due to heavy expense ratios.
As a general rule, most low-cost, passively managed index funds tend to be ETFs rather than mutual funds. Many charge expense ratios under 0.1%, and Fidelity has gone so far as to create zero-expense ratio funds with no minimum investment.
If you’re wondering whether expense ratios really make much of a difference, consider this mathematical breakdown by Pew. They compare two investors’ returns, both of whom earn average salaries ($60,000) and invest $175 every two weeks starting in their 20s. One invests in a fund charging 2.05%, and the other invests in a fund charging only 0.05%.
After 40 years of investing, the investor who paid 0.05% had over $300,000 more in her retirement account than the other investor. To reach the same balance, the other investor would have had to work five years longer.
Expense ratios and fees matter.
5. Look for No-Load Mutual Funds
Some mutual funds charge fees when you buy or sell them. Aim to avoid them whenever possible.
Funds that charge a fee when you initially buy shares are called “A share” mutual funds, and the purchase fee is called either a “front-end load” fee or a sales charge. For example, if a fund charges a 5% front-end load, and you buy $100 in shares, you’ll be charged an extra $5 in fees on top of your shares.
Funds that charge a fee when you sell are called “B share” funds, and the fee is called a “back-end load,” surrender charge, or contingent deferred sales charge. Say you buy $100 in a fund charging a 5% back-end load, and your shares rise in value to $110. When you sell, the fund deducts 5% from your proceeds, or $5.50. You walk away with $104.50.
Other funds put a time limit on back-end loads and only charge them if you sell within a certain timeframe. The 5% back-end load might only apply if you sell within 90 days of buying, for example.
Then there are mutual funds that charge an ongoing service fee, also known as a marketing fee or 12(b)1 fee. These are called “C share” funds, and they charge this ongoing fee on top of the annual expense ratio already charged.
Nobody wants to pay fees or spend the time figuring out which mutual funds charge which fees under what conditions. If you want to invest in mutual funds versus ETFs, look for no-load funds that keep their expense ratio low and don’t charge any ongoing service fees.
6. Scrutinize Your 401(k) for Hidden Fees
Unfortunately, many 401(k) plans offer only a limited selection and include many ETFs or mutual funds with high fees and expense ratios.
Those are the obvious costs. Even worse, some mutual fund plans include hidden fees and costs, such as advisory fees, transaction fees, and recordkeeping fees.
Fortunately, it’s not difficult to calculate your 401(k) fees. One tool that makes it easy to uncover hidden fees and costs is Personal Capital’s Investment Checkup tool. It accesses your current account’s fees and even shows you how they compound and add up over time.
Pro tip: You can also sign up for a free portfolio analysis from Blooom. Once you’ve added your IRA, 401(k), or other retirement accounts they will dig into your asset allocation, portfolio diversification and the fees you’re paying.
7. Don’t Try to Time the Market
Before the era of commission-free trades, timing the market was even more costly than it is today. Investors got slapped with commissions every time they darted in and out of the market.
But even with commission-free trading, you shouldn’t try to time the market. It can lead to higher taxes due to buying and selling shares in under a year and therefore paying the regular income tax rate on capital gains. It also leads to emotional investing, poor decisions, and lost income yield. Trying to time the market is precisely why the average investor sees lower returns on their investments than the market as a whole yields, according to a report by DALBAR.
Besides, tomorrow’s dip may still be higher than today’s pricing. Stop leaving money on the table by trying to outsmart the market, and simply automate your investments instead. As an added bonus, it saves you time and headaches from constantly watching the markets like a hawk.
8. Use a (Free) Robo-Advisor
Human advisors cost money — sometimes a lot of money. But you can utilize artificial intelligence in the form of a robo-advisor for free.
In many cases, robo-advisors actually outperform their human counterparts. They don’t panic, they don’t get “hunches,” they rebalance your portfolio automatically, and they can process data and information far faster.
When you first create an account with a robo-advisor, you fill out a questionnaire including your age, financial goals, risk tolerance, and other factors that impact your investing strategy and asset allocation.
I use Schwab’s Intelligent Portfolio service, which is free for investors with at least $5,000 invested. For investors who want human hybrid investment advising with access to speak with certified financial planners, Schwab’s Premium service charges a flat fee, unlike most hybrid advising services that charge a percentage of your assets under management.
Other robo-advisors you should consider are Betterment, M1 Finance, and Ellevest.
9. Pay a Flat Fee for Human Financial Advice
Sometimes, you just want to talk to a human being.
Investing advisors, certified financial planners, and other types of financial advisors can help you form a strategy that meets your needs. But traditional money managers want to charge you an ongoing fee for their help, regardless of how much time they spend working with you and your money. Many investment advisors charge 2% of your assets under management every year, which adds up quickly.
With a portfolio of $200,000, a 2% fee comes to $4,000 each year for very little work on the part of your advisor. You wouldn’t pay $4,000 a year for any other service lightly, so don’t get complacent about your advising fees.
Instead, consider hiring an investment advisor or financial strategist by the hour. They can review your current investments, advise you on how to optimize them, and help you form a plan to keep your investments on track. You can ask them your questions, walk out feeling comforted, and check in with them again a few years later.
Some advisors also offer a flat-fee option to manage your money for you. Decide what’s right for you, stay informed, and avoid overpaying a percentage of your wealth. You can review lists of flat-fee or hourly financial advisors on the Garrett Planning Network or the National Association of Personal Financial Advisors. You can also use a tool from SmartAsset that has you to answer a few questions and then they’ll give you a few vetted advisors in your area.
10. Explore Private REITs
Beyond stocks, ETFs, mutual funds, and publicly traded REITs, middle-income earners can now invest in private equity REITs as well. These funds were once restricted to accredited investors, but the SEC set out specific regulations allowing ordinary investors to participate if the private REIT meets their standards.
These funds invest money in one of two ways: The fund managers invest directly in real estate, they lend money against real estate, or they do both. For example, Fundrise invests money both ways and offers several investment options depending on whether you’re looking for income and dividends or long-term appreciation and growth.
As a mid-term option, I also like GroundFloor. They exclusively lend money against investment properties in the form of hard money loans. You get to pick and choose which properties you want to lend money against, and most loans range between 9 and 12 months.
Although private equity REITs do charge fees, the best are extremely transparent about them, often charging less than publicly traded REITs. GroundFloor shows you upfront what you can expect to earn from any given investment. Rather than charging fees, they simply lend money at a slightly higher rate than they pay out to investors.
Private REITs aren’t the only option on the table for indirect real estate investing, either. You can also consider private notes, private equity funds, wholesaling, or ETFs with broad exposure to the real estate industry, such as homebuilder stocks. Or, of course, you could buy real estate directly.
11. Manage Your Own Rental Properties
If you own rental properties, you can save on fees by managing them yourself rather than hiring a property management company.
Property managers typically charge at least two types of fees: a percentage of rent collected (usually 8% to 10%), and a fee for placing a new tenant in a vacant unit (typically a half-month’s or one full month’s rent). Depending on your turnover rate and the manager’s fees, that generally means losing 10% to 15% of the rent to property management fees.
Granted, you should still factor in property management costs when forecasting a rental property’s cash flow. You never know when you’ll become unable or unwilling to continue managing your own portfolio. It does take work, and not everyone has the time or inclination for it.
Just as importantly, property management is a labor expense, regardless of who performs the labor. To ignore it is to miscalculate the costs to own real estate, even if that cost comes in the form of your own time.
Still, you can save hundreds or thousands of dollars every month by managing your own property portfolio, so it’s an option worth considering.
In today’s world of financial transparency, it’s easier than ever to minimize your fees and other investing costs.
The first rule is simply to pay attention. Do you know what you’re currently paying in bank account fees? In brokerage commissions, fund expense ratios, 401(k) fees?
Many people don’t. There’s almost always a free or cheap option available that doesn’t sacrifice features. Your mission, if you want to build wealth faster, is to find where your investments are currently leaking money and then to plug the gaps by finding those better alternatives.
How do you minimize investing fees and costs in your own portfolio? Where do you think you’re losing money, and how do you plan to stop the bleeding?