Hidden Fees:
There are up to 13 layers of fees within any given mutual fund. The financial services industry thrives on the consumer’s inability to determine how and how much they are paying for investments and services. Understanding the impact of fees requires that you can first locate these fees, then do the math to unravel the actual cost to them.
Identify and reduce these 3 sources of hidden fees to optimize your net worth:
Hidden investment fees: Part 3 of our blog series on the Investment Fiduciary.
In the first two parts of this series we defined the fiduciary and covered how conflicts of interest can enter into the advisor/client relationship. Today we will discuss sources of hidden fees and the unbelievable impact they have on your net worth.
1. Sales loads/commissions: Mutual funds, annuities, insurance and other investment products.
Many of these products which have historically paid the broker behind the scenes are now available in no-load or no-commission versions. If you are unsure what you are paying for an investment, there is a very good chance that the person or company selling you the investment is being paid on the side to put you in the product.
2. Transaction costs: The hidden cost above and beyond the published expense ratios.
If you look into the fund holdings in your brokerage or 401k account, you can easily find the stated expense ratios. The problem is this ratio does not include the transaction costs generated by the trading within the investment. These hiden costs are difficult to find, and it is not uncommon for them to
double or triple the total expenses. Run your mutual funds through personalfund.com for an
eye opener.
3. Stock picking: The price of assuming that an investment manager can dependably outperform the lower cost alternative.
Study after study, research upon research, and book after book have attempted for decades to grab the investing public’s attention on this issue. Attempting to outperform the broad market by selectively picking stocks DOES NOT WORK with any level of pedictability. If your fund has total expenses of over .25%, it should be a target for replacement.
But how much can these hidden expenses really cost?
The most important takeway is the impact a seemingly small percentage of fees can have on your net worth. Just this week we sat down and ran an analysis on a married couple’s 401k plans. Even with their limited investment options, we were able to reduce their total expenses from nearly 1% to .15%.
That savings, compounded over 30 years, could increase their net worth by over $2 million! Worth the effort?
