Impose

What Is Impose?

Impose is a term that refers to the act of placing a fee, levy, tax, or charge on an asset or transaction to the detriment of the investor. The imposition of fees is a common practice in most investment products and services and may be used as a deterrent to selling or exiting a financial position early.

Understanding Impose

Fees are inevitable, regardless of whether you are a small retail investor or a multinational investment bank (IB). Just about every financial service involves a payment to the party that helps to facilitate the transaction.

Most fees should be made known to investors before they purchase a new security or move funds in a way that will incur a charge of some kind. Many fees are imposed not at the time of the transaction but instead levied on an annual basis as a percentage of assets or holdings.

Types of Fees Imposed on Investors

Investors can put their money to work in different ways. Some prefer to let someone else, such as an investment advisor, take complete control of their capital. Others might have an idea of which asset class they wish to invest in and from there elect to entrust a fund manager to choose the relevant securities on their behalf. Alternatively, there are those that opt for a completely do-it-yourself (DIY) approach, taking on the task of selecting individual stocks to invest in alone through a brokerage account.

Naturally, the more investors outsource decisions, the more they usually will have to pay. External expertise comes at a cost, although that is not to say that going solo is always a much less expensive endeavor.

Investment Advisor

Investors who want someone else to administer their capital will typically be charged a percentage of the total assets managed. These fees, which tend to vary depending on the size of the account and portfolio, can sometimes be partially funded with tax-deductible dollars.

Usually, fees are debited from accounts each quarter. That means that if an investment advisor charges 1.5% for every $100,000 invested, a client with that sum under management would pay $375 every three months.

Mutual Fund

Mutual funds, professionally managed investment vehicles that pool together money from numerous investors to purchase a portfolio of securities, cost money to run. Investors that go down this route are expected to chip in to help cover these operating expenses, consisting mainly of management and administrative fees**,** by paying what is known as an expense ratio (ER).

The ER, which is calculated by dividing a mutual fund's operating expenses by the average total dollar value for all the assets within the fund, is not presented as a bill to be paid immediately and is instead deducted from the return that the investor receives. Some mutual funds also add on fees and penalties for early withdrawals as well as a commission when buying or selling them.

Charges vary depending on the type of asset class the fund is invested in and the level of management required to run the portfolio. For instance, funds that invest in small caps will often impose a higher fee than those that specialize in bigger companies. Understandably, actively managed vehicles also impose heftier charges than passive ones, such as index funds.

Broker Transaction Fee

Brokerage accounts impose a transaction fee on investors every time they buy or sell a security. These charges, typically ranging from $5 to $50, encourage investors to execute larger trades and tend to make them think twice about regularly tweaking their portfolios, even if discounts are sometimes offered for regular activity.

Special Considerations

Consumers are also imposed with several charges for just managing cash in their bank accounts.

Fees Imposed by Banks

Since the 2008 financial crisis, more and more banks have imposed fees on customer accounts and transactions. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 implemented a number of new regulations and rules for the finance industry, which translated to more fees for banking customers.

The Durbin Amendment to the Dodd-Frank Act placed a cap on the fees banks may charge to merchants for processing debit card purchases, resulting in even higher expenses for account holders. Banks also impose fees at automated teller machines (ATMs) because ATM fees make these off-premises banking options more profitable. Often, the bank that owns the ATM imposes a fee, and the bank that issued the customer's debit card, if it is a different bank, imposes its own fee. This can lead to total ATM fees of $11 or more in some locations.

Other types of fees banks might impose include:

According to the Federal Reserve (Fed), banks can only charge customers overdraft fees on debit card transactions if the customer opts in.

Large banks, those with assets of $50 billion or more, charge the most fees because they are less efficient than smaller banks, and they must pay more to maintain common demand-deposit accounts. Increasingly, customers are choosing to avoid the imposition of most fees by banking with smaller community banks or credit unions.