Don't Pay Your Broker for Free Funds

I was looking through my broker's commission schedule when something struck my eye: a transaction fee to buy mutual funds. At first, I thought it was talking about funds with sales loads -- fees that some funds charge when you buy shares.

But upon reading further, I realized that those charges would apply even to customers buying many no-load mutual funds. Since the whole point of no-load funds is that they charge no up-front fees, I wondered why a broker would charge for something their customers could get free on their own.

They're everywhere
It's convenient to consolidate all your stocks and mutual funds with a single broker. You can easily see your full financial picture, moving money among different stocks and funds without delays, and getting reports that include all your assets. But if you're paying for the privilege of holding your no-load mutual funds at your broker, you have to ask yourself: Is it really worth the price?

Unfortunately, my broker's not alone. Quite a few discount brokers have transaction fees for buying mutual funds. Some specifically charge transaction fees only on no-load funds. Here's a look at fees imposed by some of the most popular brokers:

Broker

No-Load Fund Transaction Fee

Extra for Broker Assistance

E-Trade Financial (Nasdaq: ETFC  )

$19.99

$45

Charles Schwab (Nasdaq: SCHW  )

$49.95

$25

TD AMERITRADE (Nasdaq: AMTD  )

$49.99

N/A

Fidelity

$75

$25-175*

Vanguard

$20-35

$0-15

Wells Fargo (NYSE: WFC  )

$35

$25

Bank of America (NYSE: BAC  )

$45 minimum**

None

* Total fee of 0.75% of amount invested, subject to minimum of $100 and maximum of $250.
** 0.6% up to $15,000, then 0.2% to $100,000, then 0.08% above $100,000.

As you can see, those fees aren't small. Are brokers just trying to get as much fee income as they can, or is there something else going on here?

Avoiding the fee
If you dig deeper, you'll notice that all of these brokers have a list of funds for which the transaction fee doesn't apply. For instance, brokers like Fidelity and Vanguard don't charge for their own funds.

In addition, most brokers offer some outside funds at no fee. Schwab, for example, include certain funds from T. Rowe Price (Nasdaq: TROW  ) and Janus Capital (NYSE: JNS  ) on its no-fee list.

Reading the fine print gives you the scoop on what brokers get in exchange for waiving their fund transaction fees. Take a look at Bank of America's disclosures:

You pay no transaction fees on these mutual funds because the participating fund companies reimburse Banc of America Investment Services, Inc. for assuming certain costs associated with your brokerage account.

Those reimbursements come in several forms. Some funds charge 12b-1 fees, which they use to pay brokers. Others pay shareholder servicing fees to brokers, which then get wrapped into the other operating costs that funds pass on to shareholders.

What to do
Before you buy funds through your broker, ask these questions:

  • Would you buy a different no-load fund if transaction fees weren't an issue? If the answer is yes, you should just buy the fund you want directly from the fund company.
  • Will you pay more in the long run? If a no-fee fund your broker offers charges higher expenses than the fund you'd prefer, it'll end up costing you more.
  • Do you do a lot of fund trading? If you're buying more shares every month, transaction fees will add up quickly. On the other hand, a one-time fee might be worth it for the convenience of having all your accounts with one broker.

Fund transaction fees are just one of the many fees your broker may be charging you. To learn more on how to find great funds without paying big fees, consider taking a look at Motley Fool Champion Funds. Offering more than just benchmark-beating fund recommendations, our newsletter also walks you through the basics of mutual funds, and shows you how to tell good funds from bad ones. Want to see more? Take a free look with a 30-day trial subscription.

For more on fund investing, read about:

Fool contributor Dan Caplinger owns his no-load mutual funds the old-fashioned way: directly from his fund company. He doesn't own shares of the companies discussed in this article. Schwab is a Motley Fool Stock Advisor recommendation, while Bank of America is an Income Investor pick. Try any of our Foolish newsletters free for 30 days. The Fool's disclosure policy costs nothing.


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