Are the Fees Too High on Your Investments?

When you invest your money, your hope is that you will grow your nest egg into something bigger, whether you're saving for retirement, your children's college fund or other goals.

A number of factors determine whether you gain or lose money on investments. One that many people often overlook is fees. In fact, according to a 2010 report by Morningstar, low-cost mutual funds outperformed high-cost mutual funds, in addition to the added benefit of letting you keep more of your money.

"The research is absolutely clear that one of the top determinants of performance is expenses," says Todd Tresidder, a financial coach and author who publishes the Financial Mentor website.

Walter Updegrave, an author and journalist, provided this example on his Real Deal Retirement website:

An investor who started at age 25 earning $50,000 a year, got 2 percent annual raises, contributed 10 percent of his salary to his 401(k) and earned 7 percent before expenses would have about $730,000 at age 65, if expenses were equal to 1.5 percent of assets. But with expenses of 1 percent, he would have almost $830,000. And with expenses of half a percent, his 401(k) would contain $934,000. That demonstrates that investing expenses that look small can have a big impact.

"When you look at compounding ... the amount of money that can become over the course of 10, 20, 30 years is startling," says Liz Davidson, CEO of Financial Finesse and author of the new book "What Your Financial Advisor Isn't Telling You."

But before your money starts compounding, you need to begin investing, and it's not always easy to find out exactly what fees you'll pay. If you're getting your financial advice for free, your advisor is most likely a salesperson who is collecting fees on all the investments he sells you. The company that manages your 401(k) plan is collecting fees, as are the companies where you hold your investments.

"You don't see it in a bill. You don't pay it with a check. They've hidden it intentionally," Tresidder says, with disclosures buried in prospectuses and other legal documents. "As long as they show it to you, they don't have to disclose it to you."

On an annuity, for example, there could be three components of the fees, which are disclosed on three unrelated pages of the prospectus. "It's not easy to tell what you're paying, especially on layered products like annuities," says Mari Adam, a financial advisor in Boca Raton, Florida. She labels annuities as the worst products when it comes to finding out what you're paying. "It's really hard to tell. It's hard to tell for us, and we are professionals," Adam says.

You may also be paying more obvious fees such as account maintenance fees, trading charges and fees to advisors, either hourly or as a percentage of your portfolio.

If you're working with a financial advisor or broker, you should ask for a list of all the fees you're being charged, by the advisor and by the funds themselves. You should also ask about fees any time you buy a new product. However, that doesn't mean you'll always get the correct answer. "At least 50 percent of the time you will be told something that's not true," Adam says. "I would welcome more transparency."

Fees, of course, aren't the whole story. If you pay no fees on an investment that declines in value, you've still lost money. If you pay twice the fees for a mutual fund that yields three times the returns, you're still ahead.

"The one thing that's guaranteed is the fees," Davidson says. "It's one of the few industries where you don't get what you pay for." But, she adds, "It doesn't mean a low-fee fund is going to outperform a high-fee fund."

Many financial professionals argue that index funds, which essentially track the market and therefore are minimally managed, are the best deal because they often outperform actively managed funds, which have higher expense ratios due to more intensive management. Others believe an actively managed fund can sometimes be a better deal.

"Fees are an important factor. They're not the only factor," Adam says. "An [actively managed] fund has better risk control. ... There are a lot of times you want a human being who can discriminate between good and bad."

There are a number of tools available to help you determine at least some of the fees you are paying on investments. The Financial Industry Regulatory Authority's Fund Analyzer will evaluate three funds at a time for you. "You want to be in the bottom quartile in terms of fees," Davidson says.

We input three funds from Vanguard (a company known for lower fees) and discovered that, if an investor were to invest $10,000 in each fund over 10 years, with a 5 percent rate of return, she would end up paying total fees and sales charges of $64.28 on one fund, $217.13 on a second and $821.07 on the third.

The Vanguard funds -- all of which charged less than the average for similar funds -- differed considerably in rates of return, with the most expensive fund of the three averaging the best one-year rate of return and the least expensive the best five-year rate, with the most expensive close behind. The middle fund, a more conservative mix of investments, had a lower rate of return. The Fund Analyzer's chart also told us that these funds had no back-end charges, no front-end charges and no redemption fees.

In contrast, using three funds that Morningstar had mentioned in an article as being expensive, the fees -- based on investing $10,000 in each fund over 10 years, with a 5 percent rate of return -- came to $1,221.68 for two of the funds and $1,416.51 for the other. The funds with the higher fees had similar rates of return to the Vanguard funds, but since the funds were of different types, it wasn't an entirely apples-to-apples comparison.

Morningstar also provides expense data at its website, and FINRA has other useful tools as well.

Here are five types of fees you should monitor on your investments.

Account fees. These fees are usually disclosed online and can include annual or monthly fees (sometimes waived if your account reaches a certain level), account management fees or fees to open, close or transfer accounts.

Transaction fees. These fees are usually disclosed and are charged when you trade stocks, bonds or exchange-traded funds. These fees vary considerably by broker, and if you are a frequent trader, you want to shop around. Fees are often higher to trade by phone or with a broker than to trade online.

Advisor fees. If you're using a fee-only financial advisor who charges by the hour or by a percentage of the money under management, it will be clear what fees you're paying because you will receive regular invoices. An advisor who doesn't send invoices but buys and sells investments for you actually is working as a commission salesperson. While his services appear to be free, he is being paid by the companies whose products he is selling you, with the commission coming out of the money you invest. Each time your broker recommends a product, you should ask for a full disclosure of the fees associated with that product, but know that you may not get a complete answer and may need to dig into the prospectus.

Expense ratios. The expense ratio, the percentage of assets deducted each year to cover expenses, can range from 0.05 percent for an index fund to 2 percent or more for actively managed funds. The average is about 0.5 to 1 percent. You can find this information at the calculation sites, and it's often disclosed in your online portfolio view.

Loads, or mutual fund sales charges. These are sales fees that go to your broker or other middlemen when you buy a load fund. This sales fee averages 3 to 8.5 percent upfront and comes out of your investment, so a 5 percent load means that for $1,000 you get only $950 worth of funds, with the rest going to fees. Some funds have what is called a back-end load, which spreads the fee over time, but you pay more if you sell early. There also may be 12-1b fees (marketing fees paid by the mutual fund to your advisor).

Teresa Mears writes about personal finance, real estate and retirement for U.S. News and other publications. She's also written for MSN Money, The Miami Herald, The New York Times and The Boston Globe. She publishes Living on the Cheap and Miami on the Cheap. Follow her on Twitter @TeresaMears.