Fees undercut returns on your investments
How much did you pay in investment costs and fees last year? If you’re like most investors, you don’t even have a ballpark idea. And those costs can add up — or, more to the point, subtract from your long-term investment goals.
This is a perfect time to uncover the hidden costs you paid for your investments. If you know what questions to ask and where to look, your investment providers are required to disclose them in writing.
Here are some common fees you might not notice:
If you have an individual retirement account (IRA), the custodian will likely charge an annual fee, deducted from your asset value once a year, typically between $25 and $50. But some online brokerage firms waive annual fees.
IRA fees:
401(k) fees: If you have a 401(k) plan at work, the employer may cover some fees. But in many companies, an individual participant’s account also pays an annual charge. According to Investopedia, the average annual account fee ranges from 0.5% to 2%. If the percentage is higher, the employer has a fiduciary responsibility to find a lower-cost provider.
Fees for investment advice are always complex. There may be a straight fee based on your assets under management (AUM). Typically, this should range from 0.5% to 1.25%. Anything higher is outrageous. But that doesn’t necessarily cover all the impact of “adviser” fees.
First, why should the adviser get to charge fees on money you’ve set aside as “chicken money” in savings such as T-bills or money markets? While the adviser needs to know your total assets to provide good advice, you should not include those assets in your fee-based AUM.
Second, there may be expensive and hidden charges in the recommended investments. So your “adviser” might be getting a rebate of the fund management fees, or even commissions on your initial investments or on your withdrawals.
Investment advice fees:
Fund management fees: If you’re invested in mutual funds, you are paying fees. The question is: How much? Index funds such as the S&P 500 stock index funds should cost you only a miniscule 0.12%. But “managed funds” can cost a lot more. Again, anything over 1% is egregious — especially since the vast majority of managed funds have failed to beat their benchmark indices over the past decade, according to Standard & Poors.
Marketing fees: Who do you think pays for all those commercials? You, the investor! There is a class of fees charged by many funds called “12-B1 fees.” They are additional fees paid out of mutual fund or ETF assets to cover the costs of distribution — marketing and selling mutual fund shares — and sometimes to cover the costs of providing shareholder services. 12b-1 fees get their name from the SEC rule that authorizes a fund to charge them.
Fund“class”fees: Some well-known fund companies offer different “classes” of the very same named fund. The only difference is that some pay the advisers with commissions taken out of your investment upfront — or perhaps at the “end” of your investment when you withdraw funds.
All of these fees and expenses can seem trivial on an annual or even on a dollar basis, even if you notice them. But not only do the fees add up, these costs are leveraged against you because you miss out on the growth of the money removed from your account by paying the fees.
Costs count. So count up your costs. Demand an accounting — in writing — from your broker, adviser or fund management company for the fees you paid last year. You want your money to work for your retirement, not your adviser’s retirement. And that’s The Savage Truth.