If you’re reading this article, you’ve made the decision to open an IRA or Roth IRA. Good job. It’s one of the best decisions you will ever make in your financial planning.
But for the uninitiated, opening an IRA can be a little daunting, and there are a few things to consider before filling out the paperwork. First and foremost, you should ask which type of IRA is best for you: a tradtional IRA or a Roth IRA. And for guidance as to which you should choose, I recommend you read the article I wrote on that particular subject.
One of the biggest determinants of your long-term investing results are the fees and commissions you pay. Every dollar that you lose to frictional costs such as these are dollars that are unavailable to compound over time. Like death and taxes, investing expenses are inevitable, at least to a point. But how much is too much?
If you use the services of a financial advisor or broker, then it is perfectly reasonable to pay advisory fees. For fee-only advisors, 1.0% to 1.5% is the industry norm. But be careful here. If an advisor is charging you an advisory fee, then they shouldn’t also be selling you commissionable products, such as mutual funds with sales loads or 12b-1 fees. You should ask your advisor to explain the fees and commissions are paying, and if they waffle on this you should strongly consider firing them.
If you manage your own IRA, then you shouldn’t be paying any fees at all. These days, virtually every popular online broker offers no-fee IRAs. Unless you are utilizing the services of a specialty “self-directed” IRA shop for non-traditional assets such as precious metals or hedge funds, there is no justification for paying service or custodial fees.
You will, however, generally pay trading commissions every time you buy or sell a stock, ETF or mutual fund. Brokerage houses are very competitive on price, and if you are paying more than $8 or $9 per trade, you are paying too much. Some — such as Interactive Brokers — charge commissions as low as a penny per share, though they require minimum commissions of $10 per month.
Which brokerage house should you choose? Honestly, among the major player in the industry, they are all roughly the same. I personally use Scottrade, Interactive Brokers, and TD Ameritrade for most of my personal trading, though Charles Schwab, Fidelity and E-Trade offer comparable services at comparable prices.
Of course, even $8 trading commissions can seriously erode your returns if you overtrade. This isn’t specific to IRAs, of course; the same is true of any taxable brokerage account.
One final piece of advice on reducing frictional expenses: Direct your broker to reinvest your dividends. You can avoid commissions altogether, and it puts new incoming funds to work instantly.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.