Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
INVESTING LESSON - Give your Portfolio Some Breathing Space - 4th Dec 21
Don’t Get Yourself Into a Bull Trap With Gold - 4th Dec 21
GOLD HAS LOTS OF POTENTIAL DOWNSIDE - 4th Dec 21
4 Tips To Help You Take Better Care Of Your Personal Finances- 4th Dec 21
What Is A Golden Cross Pattern In Trading? - 4th Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Investors You’re Getting Robbed

Interest-Rates / Learn to Trade Dec 11, 2013 - 04:44 PM GMT

By: Investment_U

Interest-Rates

Alexander Green writes: A Note From the Editorial Director: We received a question recently from a regular Investment U reader on a subject that comes up too often: The costs he’s paying his broker. He writes:

“I recently had a very frustrating conversation with my broker. I wanted to know how much I’m paying in fees and commissions to work with him. And I couldn’t get a straight answer! I still don’t have it sorted out. Is this a common experience? Should I fire him?”


I’ll have more to say on broker fees in this week’s Oxford Insight, our newsletter for Oxford Club Members. But this question also called to mind something Alex wrote on this very subject last summer. Every word is still true, and it’s clearly time for a refresher. If you’re using a full-service broker, pay attention.

- Andrew Snyder

You don’t know how much you’re paying in investment costs. (I’ll explain why in a moment.) But if you are using a full-service broker or insurance agent, it’s almost certainly way too much.

Take mutual funds, for instance.

Broker-sold funds don’t just have front-end and back-end loads (commissions), they also come with 12b-1 fees attached. For the uninitiated, that’s additional compensation paid annually to the broker who sold you the fund.

On top of loads and 12b-1 fees, each fund charges management and administrative fees and has to cover security spreads and trading costs. High costs are just one of the many reasons that more than 95% of actively managed funds can’t beat an unmanaged index fund over the long haul.

You can’t find shelter in broker-sold index funds, either.

Unless it’s an exchange-traded fund (ETF), it almost certainly has much higher costs than ones offered by big no-load families like Fidelity, Vanguard or Charles Schwab.

Ignorance Is Expensive

Of course, mutual funds and their high fees are only one of the ways you’re paying through the nose. There are expensive whole-life policies (which I covered in this column), annuities with their high mortality expenses and surrender penalties, stock-trading commissions, annual wrap fees, and so on.

In a recent op-ed piece in The Wall Street Journal, Burton Malkiel noted that from 1980 to 2006, the U.S. financial services sector grew from 4.9% to 8.3% of GDP.

Most of that jump represented increases in asset-management fees. Yet even though most clients get no performance advantage from these higher fees – quite the opposite, in fact – few complain for a simple reason.

They don’t know how much they’re paying.

Don’t get me wrong. The SEC requires disclosure of investment costs. But the fees are buried inside of legal forms, account opening documents and inch-thick prospectuses.

Bleeding Out

For example, my father-in-law Tony used an investment advisor who recommended an expensive family limited partnership and filled it with broker-sold investment products. I asked Tony if he had any idea what this was costing him.

He shrugged his shoulders.

“Ask him,” I said. “I’ll lay serious odds that you never get a hard number.”

He disagreed. He said his advisor was a good guy and that he’d get the information.

But he didn’t. His broker’s response to the first inquiry was a gentle brush-off. “Tony, don’t worry. I’m taking good care of you here.”

A further push for a written accounting of total expenses paid netted a more forceful response. “Tony, your costs are reasonable. I’m doing a good job for you. What’s the problem here?”

The problem, of course, was that Tony was getting bled dry – and he never did find out what he was paying in total costs.

He did know, however, that after more than a decade the partnership still wasn’t worth any more than what he started with. Set-up fees, maintenance fees, accounting fees and investment costs were devouring his entire return.

“And the final kick in the ass,” said Tony, “was he charged me $60K to liquidate the partnership. The returns I had planned for my kids went entirely to my advisor.”

This story is not unusual. Most clients don’t ask their advisors for a full accounting of costs. So most advisors don’t provide them.

Pay Attention

This doesn’t mean your advisor is a bad guy (or gal).

In my experience, most stockbrokers and annuity salesmen are trying to do a good job for their clients. And they have been well trained to explain the benefits of what they offer. (Even if it often means glossing over the drawbacks.)

If your advisor doesn’t provide a ready answer for how much you’re paying in total costs, it’s generally because he has no idea himself. After all, to provide you with a hard number, he’d have to dig out every prospectus for every product, calculate the total costs paid for each, then add them to the trading commissions, loads and wrap fees you’re also paying.

If you find this a little surprising, it may be because you’re unaware how much pressure your advisor is under to convert a percentage of client assets into firm assets. (Although he or she is well-incentivized and compensated for the task.)

What is the solution? The first, of course, is to manage your money yourself. If you don’t feel qualified, you might read my first book, The Gone Fishin’ Portfolio, a primer in how to manage your money in a sophisticated way with minimal costs. Pair it with my latest book, An Embarrassment of Riches, which offers a powerful antidote to our culture of negativity and shows you exactly how positive thinking can make you happier and wealthier.

Of course, certain people truly need an investment advisor.

They may be too emotional to effectively handle the market’s roller-coaster rides. Some lack a thorough understanding of basic investment concepts. Others are too busy traveling or running a business. And some, quite frankly, just don’t want to fool with it.

In this case, you might opt to use a registered investment advisor who charges a reasonable fee and invests through a discounter like Schwab or Fidelity. This prevents you from getting into an adversarial transaction-based relationship.

Whatever path you take, know and understand your investment costs. They may be subtle. They may be hidden. But like termites gnawing away inside an antebellum mansion, they can do enormous damage over time.

Good investing,

Alex

P.S. We want to hear about your own experiences with full-service brokers and other financial advisors. Do you know how much you’re paying? Do you think you’re getting a good deal?

Source: http://www.investmentu.com/2013/December/broker-fees-youre-getting-robbed.html

http://www.investmentu.com

Copyright © 1999 - 2013 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in