You have decided to add mutual funds to your well-balanced portfolio. Your next step is to sift through the myriad of choices -- where do you buy mutual funds and how much is it going to cost you?
You can always go it alone and buy mutual funds from a no-load mutual fund company (such as Vanguard or T. Rowe Price or from a discount brokerage firm (such as Schwab or Fidelity). You can even seek the help of an advisor. However, when choosing how you want to purchase a mutual fund, you would be well advised to consider several factors that will affect your investment -- factors like fees and expenses, services provided and the availability of mutual funds.
The most common questions investors seeking advice for their mutual fund portfolios ask are: “Where do I go for advice?” and “How much will I pay?” You have several choices. You can hire an advisor who works for a full-service brokerage firm, discount brokerage firm, mutual fund company, bank, Registered Investment Advisor (RIA), or insurance company.
Do Your Homework
In order to understand the cost of advice, you’ll need to do a little homework, ask questions and demand full disclosure from each advisor. It’s no secret that if you seek advice you will have to pay for the service. But another question that might provide clarity when choosing an advisor is: “What services do I receive for the fees I pay?” Is the advisor simply getting paid to make a transaction, is he/she paid to provide investment advice or is he/she offering comprehensive financial planning? The answers to these questions will help you decide if the advisor is worth the cost.
What is the Cost of an Advisor?
If you choose to hire an advisor to purchase your mutual funds, you have several options with respect to paying him/her. In most cases, the advisor will dictate how he/she is paid (depending on whether they work for a bank, brokerage firm, RIA, etc.). You can expect to either pay an up-front sales charge for each buy transaction, a back-end sales charge for each sell transaction or an annual investment management fee. Sales charges may be as high as 7% and annual investment fees may range from .75% to 1.50% on assets under management. In addition to the sales charge or annual investment fee, expenses are charged by the mutual fund company for managing the fund.
Going It Alone
If you choose to go it alone, it is still important to understand the fees and expenses you’ll be charged by the mutual fund company. No-load does not mean “free.” Management and operating expenses are always charged by the fund company and should be researched prior to investing.
In addition to the management and operating expenses, if you buy a no-load mutual fund, you may pay a transaction fee through the discount broker or mutual fund company. These fees range from $0 to $75 depending on the size of the transaction and the particular mutual fund purchased. It’s also important to note that many funds will charge a redemption fee of 2% if you sell your shares in the fund within 90 days of purchase.
If you are a do-it-yourselfer by nature and would like to go it alone in the mutual fund world, there is no shortage of options available to you. There are many discount brokers and mutual fund companies that offer direct investment opportunities and many are even available online.
So, you have decided to add mutual funds to your well-balanced portfolio. You have a better understanding of where to buy mutual funds and how much it will cost you. You should then start to research the individual funds with a full understanding of the fees. Your next step is to decide which funds to buy in the context of your overall portfolio.