Like any other purchases consumers make, it's imperative that people understand the costs of the financial service that they receive. There are largely three types of fees that financial professionals charge:
- Commission: Commissions are paid to the person (financial advisor or broker) who sold the products to a client, by the company whose product is sold. In mutual fund investment, commissions are paid by clients as Points. The type of mutual funds that pay commission is called "Loaded" or "A-share". The commission usually starts at 5%. For example, if one invests $10,000, the commission of $500 is deducted from the initial amount and only $9,500 will be invested in the client's account. The percentage of fees goes down once the client reaches a certain amount, called a "Break Point". See the chart below from FINRA.org):
Sample Breakpoint Schedule
Class A Shares (Front-end Sales Load)
Investment Amount Sales Load Less than $25,000 5.0% $25,000 but less than $50,000 4.25% $50,000 but less than $100,000 3.75% $100,000 but less than $250,000 3.25% $250,000 but less than $500,000 2.75% $500,000 but less than $1 million 2.0% $1 million or more 0.0% According to this schedule, if one invests a total of $100,000 in payments over years, he would have paid about $4,187 in commission/fees. Any new money invested will continue to be charged at a certain percentage, until the total assets hit $1,000,000. But even if one invested 1 million dollars and avoided any commission, these actively managed funds have associated fees, called expense ratio, that's charged at a flat rate regardless of amount of asset. According to MorningStar, the average A-class mutual funds is 1.25% per year (See related article on US News here)
Fee-base
- Fee-only
As Forbes explains in the article, Brokers Are Salespeople, Not Financial Advisers,
You need to decide if saving costs value of service you receive. If you ask me, I'd say both are absolutely important factors.