Avoid Investing Charges By Trading -- Firms, That Is

Kiplinger's Personal Finance shows you how to avoid the most annoying fees and save thousands of dollars a year.

Making a buck on your investments is tough enough without watching your profits get nibbled away by fees that are pesky at best and punitive at worst. The best way to avoid them is to deal with firms that offer the best value for the services you want.

Lance Cashion saved $3,200 in commissions over the past year by using a broker in sync with his investing strategy. Cashion, a 33-year-old technology executive at an insurance firm, frequently trades stocks and options. But the fees at TD Ameritrade "were killing me," he said. TD Ameritrade charges $9.99 per online stock trade and $9.99 for an options trade plus 75 cents per contract.

So last year, Cashion switched to Zecco Trading, which offers 10 free stock trades a month on accounts with $2,500 or more and charges $4.50 per stock trade thereafter. For options, Zecco charges $4.50 per online trade plus 50 cents per contract.

But commissions aren't everything. Cashion and his wife, Kathryn, keep their retirement assets with TD Ameritrade because they like the firm's service.

Online brokers charge an average of $10 per stock trade, says Adam Honoré of Aite Group, a financial research firm. That's considerably less than the $30 or more that full-service brokers charge for an online stock trade. If you don't need the extra attention, don't pay for it. Buy-and-hold investors should avoid brokers that charge an inactivity fee. E-Trade Financial, for example, slaps a fee of $40 per quarter on account holders who don't make trades.

Investors with smaller balances should mind account minimums. Vanguard, for instance, has a well-earned reputation for low-cost mutual funds. But it charges an annual service fee of $20 for each fund with an account balance of less than $10,000. You can avoid the charge by getting electronic delivery of your statements.

Most broker fees are clearly listed on a firm's Web site or in a brochure. One glaring exception is the 12b-1 fee, which is really a sales charge in disguise. Check the fee table in a fund's prospectus to see whether it charges a 12b-1.

If you build your own portfolio, selecting no-load funds can save you more than 5 percent in sales charges. And over the long term, the top-performing funds tend to be those with the lowest costs. A fund's annual operating expenses (its expense ratio) are calculated as a percentage of the assets you have invested. Invest $10,000 in a fund with an expense ratio of 1.5 percent, and you'll pay $150 per year.

Avoid stock funds that have an annual expense ratio of more than 1.5 percent and bond funds with a ratio of more than 1 percent. If you invest in a fund of funds, such as a target-date retirement fund, make sure it doesn't charge a management fee on top of the expenses levied by the underlying funds.