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Why expenses matter

How competitive pricing on brokerage products can improve your returns.

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You can’t control whether stocks go up or down, whether interest rates rise or fall, or how fast the economy grows. But you can control a major factor that affects your bottom line: the amount you pay for investment products and services. Taking steps to reduce your fees may be among the easiest and most effective ways to improve your investment performance.

But beware of simply chasing low costs. “Like anything you buy, investment products cost money; however, it is important to look at the overall value provided for the services you want and need,” says Ram Subramaniam, president, Fidelity Brokerage Services. “Getting good value for your investment services can help improve your performance and ensure that more of your return ends up in your pocket.”

The fee structure of investment products varies, from annual percentage charges based on assets under management to sales loads, fees for service, and annual fees. All of them vary by provider, and all can have an impact on your returns. This article looks at a few different types of investment and cash management fees to show how they can affect you—but this is just a sampling. You should consider the costs of all your investment products.

Mutual fund fees

Mutual funds come in lots of different flavors. Fidelity’s brokerage platform offers more than 10,000 funds, including passive index funds and exchange-traded funds (ETFs) that attempt to track a basket of stocks found in an index, and actively managed funds that attempt to outperform the market. Just as the different funds offer different types of services, so, too, fees can vary widely.

Virtually all funds and ETFs include an annual fee for investment management. They also charge for other services, such as recordkeeping, taxes, legal expenses, accounting, and auditing. Some funds also charge a marketing fee. All these expenses are included in the expense ratio—which is published in the fund’s prospectus.

Typically, index funds and ETFs charge lower fees, and attempt to re-create the performance of a benchmark index by holding a basket of stocks. Actively managed funds attempt to perform better than their benchmark through analysis of individual stocks and companies, and ongoing portfolio construction, and may charge higher fees. But even within the universe of actively managed and index funds, there are significant cost differentials.

Expense ratios, however, may not capture all the costs investors should consider when selecting funds. There are a few costs that are not included in the expense ratio—including sales charges, or “loads,” that are paid when you first buy a fund, which are often used to compensate advisers for their advice. Some funds also charge deferred sales charges and redemption fees.

How much do fees matter? A fund’s expense ratio is subtracted directly from its annual return, and because costs compound the same way earnings do, even small differences in price can make a big impact over time. At the same time, performance has the potential to more than offset differences in cost—so you should consider expenses within the context of the performance you expect.

Stock commissions

Investors buying and selling individual securities are exposed to commissions and other fees that accompany these transactions, such as the flat per-transaction fee or percentage-of-assets commission they pay when buying stocks or ETFs.

These fees tend to be small in dollar terms, so you may simply accept them as a cost of doing business. But if you trade frequently or tend to trade small amounts, these costs may have an effect. For example, if you trade 150 times each year, the difference between a $7.95 commission and a $9.99 commission could total more than $300.

Like all these costs, commissions need to be weighed against value. When it comes to stock trading, one of the key differentiators is price improvement. Here's how it works:

Brokers will send an order to an exchange, electronic communication network (ECN), or other market for execution. If a sell order executes at a price higher than the best bid listed, or if a buy order executes at a price lower than the best offer listed, it is considered price improvement. Many brokers will talk about price improvement and imply that a large percentage of shares receive price improvement. However, the detail you want to know is the dollar value per share of that price improvement. Some brokers are able to achieve a greater dollar value of price improvement than others by accessing dozens of competing market centers, among other factors. Along with commission, price improvement is an important consideration for traders.

Bond markups

Bonds aren’t traded on open exchanges the way stocks are, and compared with stock trades, they may have some less transparent charges. When you buy a bond on the secondary market, you pay the asking price as well as the markup—a transaction cost that is the difference between the price a broker-dealer pays for a bond and the price at which it is sold to you. With new-issue bonds, the broker’s compensation is included in the face value, so you do not pay a separate transaction cost. But if you are buying a bond on the secondary market, it is important to consider the impact of bond markups on performance.

Bond markups vary by issue, order size, and broker. The markups can be small amounts, such as 0.1%, or more significant—in some cases more than 2% of a bond’s face value. Making matters tougher for investors is the fact that certain brokers bundle this fee with the quoted bond price—making it hard to evaluate how much you are paying your broker. If these fees are large, they can take a big chunk out of your returns. Say you set up a bond ladder, investing $300,000 across 300 bonds. Comparing a 1%-per-bond markup with a 0.1%-per-bond ($1-per-bond) markup equates to a saving of $2,700.

“Understanding bond markups is very important, particularly in today’s bond market,” says Richard Carter, Fidelity vice president of fixed income products and services. “If you are buying a bond that yields two percent and you’re charged a one percent markup, it could erase a significant portion of your income and total return.”

Margin rates

When investing on margin, you borrow money, using your portfolio as collateral, and invest it. The leverage created by the borrowed assets affects your performance either positively or negatively. But costs can play a significant role in these transactions.

You pay interest on the loan, of course—and the higher the interest, the less of any gain you get to keep (or the greater your loss will be). Say you buy $20,000 of stock on margin, and hold it for 90 days. A difference of 0.675 percentage points on your margin rate—for example, a 7.25% rate rather than a 6.575% rate—would cost you more than $100 more over that three-month time frame.

Cash management

Most banking fees may seem pretty minimal, but those costs can pile up. For example, the average ATM fee is close to $3; if you go to the cash machine every week, that could add up to more than $150 a year. A checking account may charge $10 a month, which quickly adds up to more than $100 a year, and when you add in minimum account balance fees, bank wires, and other service charges, cash management fees can quickly reach hundreds of dollars per year.

This is why it’s important to look at the fees you pay and make sure they are competitive.

It is also important to consider the credit cards you are using for purchases. Annual fees can rack up expenses, whereas rewards credit cards can offer important benefits—including saving on everything from airline travel to cash back for savings.

“Cash management products are increasingly competitive, with many brokerages and banks offering free ATM withdrawals, no account fees, and other discounts,” observes Subramaniam. “It makes sense for consumers to shop around for good prices on these services.”

Managing the risk of paying too much

Diversification is sometimes described as the only “free lunch” in investing—a way to reduce volatility without necessarily sacrificing returns. However, this is not quite accurate: You can do the same by managing costs. Being mindful of fees and other expenses in your investment process can make a considerable difference in your overall return and in your ability to meet financial goals.

“Investors have to weigh performance, service, and strategy along with cost when choosing products and services,” says Subramaniam. “But it makes sense to consider value too—because anything you save on fees can be put to work in achieving your real goals.”

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Free commission offer applies to online purchases of 65 iShares® ETFs and Fidelity ETFs in a Fidelity brokerage account with a minimum opening balance of $2,500. The sale of ETFs is subject to an activity assessment fee (of from $0.01 to $0.03 per $1,000 of principal). iShares ETFs and Fidelity ETFs are subject to a short-term trading fee by Fidelity if held less than 30 days. ETFs are subject to management fees and expenses.
$7.95 commission applies to online U.S. equity trades in a Fidelity account with a minimum opening balance of $2,500 for Fidelity Brokerage Services LLC retail clients. Sell orders are subject to an activity assessment fee (of from $0.01 to $0.03 per $1,000 of principal). Other conditions may apply. See Fidelity.com/commissions for details.
Minimum concessions apply: Online $8; if traded with a Fidelity representative, $19.95. For U.S. Treasuries traded with a Fidelity representative, $19.95 per trade. Fixed income trading requires a Fidelity brokerage account with a minimum opening balance of $2,500. Rates are for U.S. dollar–denominated bonds; additional fees and minimums apply for non-dollar bond trades. Other conditions may apply. See Fidelity.com/commissions for details.
1. Other concessions or commissions may apply if traded with a Fidelity representative. The offering dealer, which may be our affiliate Fidelity Capital Markets, may separately mark up or mark down the price of the security.
Investing involves risk, including risk of loss.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible.
Diversification/asset allocation does not ensure a profit or guarantee against loss.
Exchange-traded products (ETPs) are subject to market volatility and the risks of their underlying securities, which may include the risks associated with investing in smaller companies, foreign securities, commodities, and fixed income investments. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risk, all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector, are generally subject to greater market volatility as well as the specific risks associated with that sector, region, or other focus. ETPs that use derivatives, leverage, or complex investing strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses, and tracking error. An ETP may trade at a premium or discount to its net asset value (NAV) (or indicative value, in the case of exchange-traded notes [ETNs]). Each ETP has a unique risk profile that is detailed in its prospectus, offering circular, or similar material, which should be considered carefully when making investment decisions.
The expense ratio is the total annual fund operating expense ratio from the fund’s most recent prospectus.
Margin trading entails greater risk, including but not limited to risk of loss and incurrence of margin interest debt, and is not suitable for all investors. Please assess your financial circumstances and risk tolerance before trading on margin. Margin credit is extended by National Financial Services, Member NYSE, SIPC.
For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive, long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Additional information about the sources, amounts, and terms of compensation is described in the ETF’s prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc., and its affiliates.
The Fidelity® Cash Management Account is a brokerage account designed for spending and cash management. It is not intended to serve as your main account for securities trading. Customers interested in securities trading should consider a Fidelity Account®.
Fidelity will waive the commission charge on eligible stock trades not executed within one second. Offer limited to market orders between 1 and 1,000 shares to buy, sell, or buy to cover stocks listed in the S&P 500® Index. Orders must be entered between 9:45 a.m. and 3:59 p.m. Eastern time on a day when the equity markets are open, and times will be adjusted when the markets open late/close early. Execution speed is calculated from the time Fidelity accepts the order to the time of execution reported to Fidelity by the executing market center. Eligible orders can be entered on Fidelity.com, Fidelity Active Trader Pro®, FAST®, wireless devices, or through a Fidelity representative. Short sales, extended-hours orders, directed trade orders, and certain other orders are excluded. Certain market and system conditions may affect qualification for this guarantee. Fidelity reserves the right to restrict or revoke this offer at any time.
All Fidelity ATM withdrawal fees will be waived for your Fidelity® Cash Management Account. In addition, your account will automatically be reimbursed for all ATM fees charged by other institutions while using a Fidelity® Visa® Gold Check Card linked to your account at any ATM displaying the Visa®, PLUS®, or STAR® logos. The reimbursement will be credited to the account the same day the ATM fee is debited from the account. Please note that there is a foreign transaction fee of 1% that is not waived, which will be included in the amount charged to your account. The Fidelity® Visa® Gold Check Card is issued by PNC Bank, N.A., and the check card program is administered by BNY Mellon Investment Servicing Trust Company. Those entities are not affiliated with each other or with Fidelity Investments. Visa is a registered trademark of Visa International Service Association and is used by PNC Bank pursuant to a license from Visa U.S.A. Inc.
The Fidelity® Cash Management Account’s uninvested cash balance is swept to one or more Program Banks, where it earns a variable rate of interest and is eligible for FDIC insurance. At a minimum, there are three banks available to accept these deposits, making customers eligible for nearly $750,000 of FDIC insurance. If the number of available banks changes or you elect not to use, and/or have existing assets at, one or more of the available banks, the actual amount could be higher or lower. For more information on FDIC insurance coverage, please visit www.FDIC.gov. Customers are responsible for monitoring their total assets at each of the Program Banks to determine the extent of available FDIC insurance coverage in accordance with FDIC rules. Refer to the FDIC-Insured Cash (Core) Disclosure Statement and list of eligible Program Banks for details. The deposits at Program Banks are not covered by SIPC. For additional information, please see the Fidelity® Cash Management Account FDIC-Insured Deposit Sweep Program Disclosure (PDF).
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Past performance is no guarantee of future results.
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Before investing, consider the funds’ investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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