As referenced in my new book Making Big Money Decisions and recent blog posts, transaction fees can take a big bite out of your returns. The good news is that the costs for holding investment funds and selling a house in the USA continue to decline, allowing you to keep more of your money. Since these investments are usually large, even small differences in the fees you pay can add up to significant amounts of money. If you are interested in finding out more about these transactions costs and tips for ensuring you are paying the lowest fees, then please read on.
Holding investments
Investment fund expense ratios have declined significantly over the last 27 years, according the Investment Company Institute’s report, “Trends in the Expenses and Fees of Funds, 2023.”
- From 1996 to 2023, average equity mutual fund expense ratios dropped by 60 percent and average bond mutual fund expense ratios dropped by 56 percent.
- The report found that in 2023 the average expense ratio for equity mutual funds fell 2 basis points to 0.42 percent, and the average expense ratio for bond mutual funds remained steady at 0.37 percent.
- In 2023, the average expense ratio for index equity ETFs declined 1 basis point to 0.15 percent. The average expense ratio for index bond ETFs remained unchanged at 0.11 percent.
It’s important to note that while average expense ratios have decreased, there are still variations among funds. Some actively-managed funds continue to have higher fees, while many index funds and ETFs offer very low costs.
Investment fund expense ratios have been declining for years due to several factors, including:
- Increased competition among fund providers: As more and more funds are available to investors, fund providers must compete on price in order to attract investors.
- The rise of low-cost index funds: Index funds are passively-managed funds that track a specific market index, such as the S&P 500. They tend to have much lower expense ratios than actively-managed funds, which try to beat the market.
- Investor awareness: Investors are becoming more aware of the importance of fees, and they are demanding lower-cost funds.
This is good news for you as an investor, as it means you can keep more of your returns. As referenced in my book, investing in funds with the same (or even similar) investment objective but higher fees can have a substantial impact on your retirement savings.
Tips for lowering investment fees
Minimizing investment fees is crucial to maximizing your returns. Here are some strategies*:
- Understand different fee types, such as expense ratios and load fees, trading commissions, and account fees.
- Choose lower-cost investments, such as Index Funds and ETFs, which often have significantly lower expense ratios than actively-managed funds.
- Use lower-cost investing platforms, such as robo-advisors and discount brokerages which typically offer lower fees than traditional in-person financial advice, and charge low commissions for trading.
- Do your research by comparing fund expense ratios and brokerage commissions, reading prospectuses before investing to understand all fees associated with an investment, and considering alternatives by exploring different investments to find the lowest-cost options that meet your goals.
- Negotiate fees with financial advisors, including account minimums required to qualify for lower fees.
Remember, the lowest fee isn’t always the best choice. Consider the fund’s performance, investment objectives, and your risk tolerance when making decisions.
Selling your house
Over the past few years, the national average real estate agent commission for selling a house, which covers both the listing agent and buyer’s agent fees, has declined from 5.8 percent to 5.47 percent. While that is a small move in the right direction, the number is expected to decline further because of the rule changes from the NAR settlement.
As a result of the settlement, Stephen Brobeck, senior fellow at the Consumer Federation of America, expects commissions will ultimately fall below 4 percent, maybe even to 3 percent, as more consumers comparison shop and negotiate commissions in a more transparent marketplace.
Tips for negotiating lower real estate commissions
While real estate commissions are typically negotiable, the extent to which you can successfully negotiate depends on various factors like your local market, the complexity of the sale, and the agent’s experience.
Here’s a general approach:
- Understand the market by researching local commission rates, and assessing your property’s appeal.
- Interview multiple agents to compare services they offer for the commission, and negotiate commission rate upfront.
- Leverage your position for fast sale potential and multiple offers.
- Be prepared to compromise by offering incentives if the agent achieves a specific sales price, or flexible terms, like the length of the listing agreement.
- Consider alternatives such as flat fee listing services, or For Sale by Owner.
Remember, focus on value by explaining why you believe a lower commission is fair based on the property’s appeal or your willingness to contribute to the sale process, and be prepared to walk away if you can’t reach an agreement.
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*The investment information contained in this post is for illustrative purposes only and should not be construed as a recommendation to buy or sell specific securities.