Fee-Based Investment

  

Categories: Managed Funds

There are two basic categories describing how investment managers earn their money. Unfortunately, the terms sound very similar, as if they were designed to cause confusion. The categories: fee-based and fee-only.

Fee-only managers get paid directly by you. Their compensation comes (like the name says) only from the fees they charge their clients. Fee-based investors can charge fees also, but they can earn commissions on top of that.

Fee-only managers might be more expensive to you, since the only way they earn a living is by charging you money. However, their advice comes without any conflict of interest. They don't earn a commission from selling you any particular fund, so if they suggest a fund, you can assume they really think it's the best option for you.

Fee-based managers are subsidized somewhat by the commissions they earn by pushing certain products on their clients. That might make them cheaper, at least in terms of your out-of-pocket expenses. But because they earn a commission, you have to look out for a potential conflict of interest. Their advice might come with additional baggage that you'll have to weigh when deciding whether to buy into a fund they are pushing.

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Finance: What is a redemption charge?8 Views

00:00

Finance allah shmoop what is a redemption charge All right

00:07

well when you redeem shares of a mutual fund in

00:11

a deferred commission purchase structure there's a charge like you're

00:15

not paying your commission upfront you pay it later Remember

00:18

that most mutual funds are sold as a shares meaning

00:22

that the commission of the fund you're buying is paid

00:25

up front That is if you've invested ten grand on

00:28

a three percent up front commission structure while when you

00:32

step up on the swimming pool starting blocks and the

00:35

money is actively starting to be invested your actually starting

00:39

the race with ninety seven percent of that ten grand

00:43

or ninety seven hundred bucks with three hundred dollars having

00:46

gone to the broker for the pleasure of selling you

00:49

that fund but some mutual funds are sold as b

00:52

shares where there is essentially an exit fee or rather

00:56

where there is a charge when you redeem the fund

00:59

either because you just want to sell it or you

01:01

die in your estate liquidates it or martians kidnap you

01:05

and force you at martian gunpoint to call in a

01:08

sell order right Well in many cases redemption fees are

01:11

waived if you hold the mutual fund some extended period

01:15

of time like a year a few years five years

01:18

something like that If you hold the fund an extended

01:20

period the annual management fee paid to the people buying

01:23

and selling securities on your behalf can then cover the

01:26

broker's commission So the money managers aren't actually losing money

01:30

in the form of that three hundred dollar commission paid

01:32

you a broker who sold you ten grand of fund

01:35

only to have you three weeks later dump it and

01:37

move on to another funds Well there are other benefits

01:39

and having this system set up because it encourages mohr

01:42

careful selection of mutual funds and longer duration in holding

01:47

them And yes the obvious marriage and dating allegories apply

01:51

here But we just won't go So when you hop

01:54

in bed with a given mutual fund read the fine

01:56

print because well all kinds of hidden feed germs exist

01:59

in bedrooms airport bathrooms and glass elevators Well all around 00:02:02.98 --> [endTime] the world

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