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These the Fees

Greater Than Financial | By Wakefield Hare | Fri Mar 04 2022

Education is a challenge, because you have to trust the information you are receiving. Last time I recommended your local library as a great place to begin learning. But today I want to provide some education for you. Here is a primer on the cost of investing and advice which will help you discover the value of the advice available to you.

Product commissions: These are charged based on a percentage of the money put into a financial product, which goes to the salesperson and company recommending the product. An example is an annuity which normally carries a 7% commission. That’s $7,000 on a $100,000 investment.

The salesperson may say the commission is not paid out of your investment and you’ll still see your full $100,000 on your statement, but consider two questions: First, if the money doesn’t come from the investor’s investment, where does it come from? The company? But where do they get their money? It’s always the investor’s money paying the commission, however indirectly.

Second, can the investor get the full $100,000 back out next month if something changes? Not without extreme costs. If you want your money back before a certain period of time, you’ll likely receive your initial investment minus 1-12%, depending on how long you’ve held the annuity.

Many mutual funds also have commissions. The commission is called a sales charge, and the upfront sales charge can climb up to 5.75% on the initial investment. The percentage depends on which share class you’re put in and how much is invested.

And because one share class has a lower upfront sales charge than others, it doesn’t mean the salesperson is doing you a favor. If there’s a lower upfront sales charge, you’ll likely be charged higher exit fees (called contingent deferred sales charges or CDSC) or higher ongoing expenses which leads us to…

Mutual fund (and ETF) expenses: Mutual funds often have recurring fees called 12b-1 fees. A large portion of this fee will go to the salesperson and company who invested you into the fund. It’s also referred to as a distribution fee. To figure out how much it is, do an internet search for your fund and then find the expense ratio. The 12b-1 fee is normally included as a part of the expense ratio.

Expense ratios on mutual funds and exchange traded funds (ETFs) can range from near zero all the way to 2%. Beside 12b-1 fees, the expenses a fund charges goes to managers and administrators of the mutual fund.

To get more information on these expenses, as well as sales charges on funds, do an internet search with the ticker symbol of your fund and “prospectus” (i.e. XYZ prospectus). Within the first few search results, you should see either a PDF link or a page containing a PDF link to your fund’s prospectus. Once you have the PDF prospectus, hit CTRL+F on your keyboard (or command + F) to do a document search, then type in any of the following to find what you’re looking for: 12-b, management fees, sales charge.  

Transaction fees: This is the cost of buying or selling a stock, bond, mutual fund, or ETF. Often an investor can see this cost directly deducted from their account, yet other times it’s absorbed by the fund or the brokerage company and added to the ongoing expenses. For individual stocks and ETFs, transaction fees have begun disappearing. However, buying and selling a mutual fund will often still come with a $10-$30 transaction fee.

Advisory fee: The advisory fee is normally deducted from the investment account managed by the financial advisor. This fee ranges from 0.15% for highly automated advisors (like robo-advisors) to 2-3% for hedge fund managers. A 1% fee is usually thought of as average but is dropping thanks to competition and efficiency.

Retirement plan expenses: Many of the expenses paid by your company’s retirement plan fall into the categories already listed, but they are worth listing separately because they are often paid by your employer. Sounds good for investors, right? Only if your company has made sure they are getting good value for the expense. If not, money is wasted which could otherwise be added to your account through a higher employer contribution.

To determine the expenses on your company’s retirement plan, you may have to dig in the weeds of your plan’s documents, and even then you could come up short of having all the information. Your next place to turn would be your company’s financial statements, which should list if they are paying a third party advisory firm and how much. You could also ask your company’s ownership.

Flat fees (hourly or retainer): These fees are normally paid out-of-pocket (by check or deducted from your bank account) as opposed to being deducted from your accounts. These are the most transparent of all the fees listed.

If you familiarize yourself with these fee types, you’ll be more equipped than most investors to make optimal decisions with your investments and finances. You can’t call yourself a good steward of your resources and not know what you’re paying for something.