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Financial Industry Fees Matter – PERIOD!

 Know Them Before You Invest

By Rick Kahler CFP®

***

One of the most important factors affecting the success or failure of your investments is also one of the least visible: fees.

When it comes to selecting managed financial investments like retirement plans, mutual funds, exchange-traded funds, annuities, and private real estate investment trusts, it’s essential to know how much you will be charged in fees.

Otherwise, you could own a mutual fund or annuity with great diversification which invests in high quality securities, yet still do no better over 20 years than had you stuck your money into a bank certificate of deposit earning 1%. You could own a private real estate investment trust that owns great properties in AAA locations, yet lose your shirt. All because you didn’t pay attention to the fees.

Let me underscore that not paying attention to the fees is really easy to do. In fact, some of those selling these products often do their best to see that you don’t pay attention. Yet it is imperative to understand, in percentages and dollars, how much you are paying.

The total cost of an investment includes up-front fees and commissions, administration fees, annual management fees and commissions, and transaction fees. This information will seldom be offered, so you need to ask lots of questions. Even when you ask, the salesperson may sidestep the question, not know the answer, or give you the wrong information.

Here are two examples that I was recently asked about

1. A woman had been advised to put her $1 million 401(k) rollover into a variable annuity sold by a well-known, established financial firm. She was told there were “no fees.” Here is what I discovered with a little research:

1. The upfront commission was 4.00%.
2. The annual fee paid to the advisor/salesperson was 1.50%.
3. The annual administrative fee was $50, and there was an insurance fee of 0.50%. No services were provided other than the administrative tasks of sending statements.
4. The charge for the underlying managers ranged from 0.80% to 1.65%, with an average fee of around 1.30%.
5. There were no transaction fees.

The total first year costs were 7.30%, and the annual ongoing costs were 3.30%. On $1 million dollars, that was $73,000 the first year and $33,000 a year thereafter. You will not build much of a retirement portfolio paying those kinds of fees.

2. A man with a $3 million investment portfolio was told he could reduce his investment costs from 0.75% to 0.25% by changing advisors. He figured this would save him 0.50%, or $15,000 a year.

This is what a more complete comparison revealed:

***

Type of Fees/Services Current Advisor Proposed Advisor
Up-front fees/commissions 0.00% 0.00%
Annual advisory fees 0.75% 0.25%
Services Provided Comprehensive planning Investment advice only
Annual expense ratio fees 0.55% 1.55%
Miscellaneous fees None $300 a year
Transaction fees $10 per trade $0 per trade

***

He was paying his current advisor 1.30%, plus a few hundred dollars a year in transaction fees, and receiving full financial planning, which included investment, tax, estate, insurance, retirement, asset protection, and cash flow advice.

The proposed advisor would cost him 1.80%, plus $300 a year in various fees, for investment advice only. This ended up being 0.50% more than his current advisor, not 0.50% less as it originally appeared.

On $3 million, a difference of 0.50% a year equals $15,000. Instead of saving $15,000 a year, he would have actually spent $15,000 more—for greatly reduced services. This is a swing of $30,000 a year, which (assuming an average return of 5.50%) would have decreased his retirement portfolio by about $1 million over 20 years.

money-pie

Assessment

Fees matter. Even small-seeming fee differences matter.

Conclusion

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 Contact: MarcinkoAdvisors@msn.com

***

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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One Response

  1. How to Uncover Investment Fees

    Before you put money into an investment, you need to know the fees that will affect your returns. Unfortunately, discovering those fees isn’t easy. Here are some suggestions to help you ask the right questions and get complete answers.

    1. Be prepared. When you meet with an advisor or salesperson, take a list of the six types of fees you need to uncover: up-front commissions, ongoing advisory fees, additional fees for services, fund manager fees (the expense ratio), miscellaneous fees, and transaction fees.

    2. Do not assume that an advisor or salesperson will readily give you full or even partial information about fees.

    3. Acknowledge your own emotional baggage around money questions. With our societal taboo around talking about money, most of us are reluctant to appear rude or to upset someone by asking about fees.

    4. Watch for evasive techniques. Companies that sell investment products spend a lot of time and expense training salespeople to “handle” consumer’s inquiries about fees.

    One technique is deflecting queries. Suppose you ask, “How much will you make on the sale of this product?” The salesperson may answer, “If I could promise you that this will give you the financial security you need, is what I make really relevant?” and then immediately talk about a feature or benefit.

    Another technique is to use jargon to confuse or intimidate. One salesperson, asked about the ongoing fund expenses for an annuity, said that was “proprietary information.” Other strategies can involve manipulation, partial answers, guilt, and stonewalling.

    5. Prepare your own written questions in advance. For example:

    Ask “How much will I pay?” instead of, “How much will you make?”

    For each fund or sub-account in an investment, ask, “What is the expense ratio?”

    Ask questions that require specific answers. “If I buy this investment today and want to get out tomorrow, how much do I get back?” If the answer isn’t “everything, plus or minus one day of market gains or losses,” the difference is probably a commission or fee.

    For a mutual fund, ask, “Will I be buying institutional (the lowest cost shares available) shares?” If not, ask what share class you would buy and ask for the difference between its annual expense ratio and that of institutional shares. The difference is sometimes the commission paid to the company.

    For an annuity, ask the amount of the annual costs charged by the company and the sub-account managers.

    Ask “What other fees could be charged that we haven’t talked about?” These can be fixed annual fees or fees to move money, purchase or sell investments in the account, open or close an account, or contribute new funds to the account.

    6. Be persistent. The reason so many advisors and firms get away with charging high fees is that consumers don’t usually question them persistently. Be the exception. Be willing to be “difficult.” Ask the same questions five or six times until you get complete answers—in writing.

    7. Remember, you don’t need to act right now. Say you always sleep on any financial decision. If you are pressured to make an immediate decision or lose out on some wonderful deal, that’s all the more reason to walk away. If you aren’t satisfied with or don’t understand the answers you receive, you can take the information to an independent financial professional such as a CPA or a fee-only planner to evaluate. Whatever you pay them will probably be the best investment you can make.

    Finally, remember that fees affect your financial well-being, and it’s your job to find out what they are. No one cares more about your best interests than you do.

    Rick Kahler CFP

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