How to Beat The High Cost of Investing

Cutting the cost of investing is more important than it has been in years. Expenses didn’t matter much when the stock market returned over 20% annually and bonds yielded over 8%. In the next 10 years, however, I expect bonds won’t return more than their current yields, and the annual average return from stocks will be 6% to 10%. What were modest expenses a few years ago now will take a big chunk of your returns.

At the same time, mutual fund supermarkets suffer from falling revenue. To make up part of the shortfall, they are increasing fees and expenses across the board. Some are making clear that they no longer want what they consider to be small accounts. (The cut-off level differs from firm to firm.) Some brokers discourage buy and hold investors; they want more fees from trading. As a result, yesterday’s low cost broker might not be a good deal today.

I continue to encourage you to consolidate investments at one broker or mutual fund. In fact, now it is more important than ever. Consolidating often earns you lower fees, waiver of certain expenses, or even a higher level of services. In addition, the brokers often have a lower minimum investment for some funds than the funds themselves charge. Many firms will consider all the accounts from a family when determining fee and service levels. If your accounts aren’t large enough to meet the break-points, encourage family members to invest with the firm of your choice.

Don’t stay wedded to your longstanding fund supermarket. Every firm changed policies in the bear market. Take a look at what others now offer and charge. You might be surprised at the best choice for you today.

In the recent past I’ve focused on the big three for mutual fund investors: Charles Schwab & Co., Fidelity, and Vanguard. Each still can be a good choice. Because of changes at these firms and experiences provided by subscribers, however, I’m expanding this survey of brokers for you to consider.

Those of you who want the option of visiting a nearby office probably will stick with Schwab or Fidelity. They charge more than pure discount brokers, but they also have offices in most major population centers. If an accessible office is important to you, however, Scottrade is worth considering. It now has over 170 offices. Schwab and Fidelity also continue to have the best technology. If you invest online, this might be important, though you should be sure that you really need all the technology they offer.

Some of you have most of your investments in funds at Fidelity, Vanguard, or T. Rowe Price. You probably should remain there and invest in other funds through their brokerage arms.

When considering a fund supermarket, it is important to look behind the “headline” numbers. For example, transaction fees tend to vary with the number of shares or dollar amount purchased. The broker with the lowest minimum fee might not charge the lowest fees on your average investment. Or a broker with a high number of funds in its no transaction fee (NTF) program might not offer the funds you really want in the program. Some funds will participate only in the Schwab and Fidelity NTF programs. Some brokers with a lot of NTF funds or low commissions have other expenses, such as high minimum account balances or account maintenance fees.

You also want to check on more subjective factors. Some brokers have very robust research tools on their web sites; others offer only the basics. Some make it easy to transfer money between accounts, even accounts outside the broker. List all the services you’d like from a mutual fund broker. Use the table nearby to form a short list, then contact each broker on the short list for details.

The table includes three different types of brokers. One type is run by a mutual fund company as a service and convenience for loyal shareholders. Vanguard, American Century, and T. Rowe Price are in this group. These brokers charge low, but not the lowest, fees. They generally do not have the most robust web sites and offerings. There also are the low-cost brokers, such as Brown & Co., Scottrade, and E-Trade. You get very low prices from these brokers by using electronic trading (the telephone or web sites). Mutual fund trading is not the main business of these brokers. The range of services offered, funds available, prices charged, and minimum account balances vary considerably.

The third group is somewhere between full service brokers and discount brokers. Schwab, Fidelity, and TD Waterhouse are in this group. Each has a wide range of services, great technology, and full service branch offices. Neither charges the lowest fees or wants to. The last few years, Fidelity’s advertising has emphasized its full range of brokerage activities instead of its mutual funds.