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الاثنين، 21 أغسطس 2017

Outrageous Investing Fees You Should Never, Ever Pay

Worried about paying too much in investing fees? It might be time to take stock of your investments and their ongoing costs, then search for a better deal.

Expense ratios for mutual funds and exchange-traded funds (ETFs) fell to a record low in 2016, according to Morningstar, with the average investor paying just 0.57%. But this isn’t the result of mutual funds and other investments lowering their ongoing management fees; on the contrary, these lower costs are the result of investors shopping around and choosing investments (and investment firms) with lower fees.

In other words, people are consistently ditching investments with sky-high fees and flocking to index funds and firms like Vanguard and Fidelity — and for good reason. Cost – or more accurately, the absence of it – is the single biggest predictor of investment returns.

Seven Outrageous Investing Fees You Should Never Pay

While any move toward lower-cost investments is good news for consumers, there are still plenty of hidden and outrageous investing fees to watch out for. Some of the worst fees are disguised, downplayed, or otherwise hidden to the point where you barely know what you’re paying or why.

And while it could seem like investing fees are just part of the game (and they are, to some extent – even the lowest cost investments carry a small fee), paying egregious fees can make a huge difference in your lifetime investing returns – as in, paying just one percentage point more than you should can drain your portfolio by thousands of dollars per year.

To avoid overpaying and to keep more of your hard-earned savings, it’s crucial to know which fees to watch out for. We spoke to a bunch of financial advisors to hear some of the worst investing fees (and combinations of fees) they see – and why you should avoid them like the plague. Here’s what they said:

Double-Dipped Investing Fees

Minnesota financial advisor Jamie Pomeroy, who blogs at Financial Gusto, says one investing fee that really grinds his gears isn’t a fee in itself, but a combination of fees.

“Double dipping” is when your advisor puts high-cost mutual funds inside an account, and then charges another “advisory” fee for the account on top of those funds, says Pomeroy.

And good example would be C-share mutual funds inside of a fee-based account. “Your C-shares mutual funds have the highest ongoing fees and should not be inside a fee-based account, which also has an ongoing fee,” says Pomeroy.

And that’s why you have to watch out for this kind of scenario. If you don’t, you could wind up paying a ridiculous amount in fees for no reason at all. Using the example above, your C-share mutual funds may have an ongoing cost of around 1.5%, and your financial advisor may be charging another 1% on top of that.

“Paying 2.5% in all-in costs is outrageous, especially since this scenario is rarely disclosed.”

Front-End Sales Loads

As Roger Wohlner of the Chicago Financial Planner notes, front-end sales loads are one of the worst fees out there. In case you’re wondering, front-end sales loads are an upfront payment to a financial advisor that comes into play when you buy specific investments. Unfortunately, these fees aren’t for your benefit as they go straight into the pockets of investing professionals while reducing the amount of your initial investment.

Here’s how this works: Let’s say your financial advisor suggests you invest $10,000 into a mutual fund like American Funds EuroPacific Growth A. With this fund, you’re required to pay a front-end sales load of 5.75% – or $575 for every $10,000 you invest.

In this case, you’d write a check for $10,000, but only $9,425 would go into your account.

“Over time, this will reduce the investor’s return versus another version of the same fund with a similar expense ratio that doesn’t charge a sales load,” says Wohlner.

High Expense Ratios

While you might be inclined to believe that most expense ratios (the ongoing operating costs of an investment) are competitive and fair, that’s not always the case. Believe it or not, there are plenty of investment options with expense ratios that are double, triple, or even quadruple the average.

As financial planner and author Brian Hanks notes, the average mutual fund expense ratio he sees his clients pay is typically between 0.63% and 0.74%. “Paying more than that for your fund is like seeing two gas stations and filling up at the one charging double the other,” says Hanks.

Before you invest in a mutual fund, make sure you understand the expense ratio and how it compares to the benchmark. If it seems unusually high, it probably is.

Annuity Surrender Charges

“Beware of surrender charges if you’re purchasing an annuity,” says Kansas City financial planner Clint Haynes. This additional fee is a surcharge you’re expected to pay if you want to sell and exit an annuity after it’s been purchased.

As Haynes notes, a lot of financial advisors who sell annuities tend to skim over this one – and for good reason. Surrender charges can be up to 15% for a period of 10 to 15 years.

“This means if you want to get out of this annuity without having to pay a surrender charge that you’re going to have to wait 10 to 15 years!” says Haynes. “That’s not a whole lot of flexibility or liquidity.”

If you’re being pitched an annuity or even some life insurance policies, be sure to understand the surrender charges along with the surrender period.

Bundled Investing and Management Fees

Financial advisor Eric C. Jansen of AspenCross Wealth Management says one of the worst fee set-ups he sees is the bundling of money management and financial planning fees together. It’s not unusual to see firms charge 2% or more to manage your money and offer financial advice, he says.

Although bundling these fees together can certainly make sense for some investors, the cost has to justify the level of services provided. After all, why should you pay management fees and financial planning fees if you can get away with paying one or the other?

Either way, fees in the 2% range should make any investor pause and re-evaluate the impact these higher fees will have on the long-term growth potential of their money, says Jansen.

“My advice is to keep your financial planning fees separate. That way, you know what you’re paying for and only pay for the financial advice you actually need, and when you need it,” explains the advisor.

High Trading Fees

If you’re an active investor who buys or sells securities regularly, you already know about trading fees. These fees are charged any time you buy or sell a security, although the amount you’ll pay can vary drastically.

According to financial planner Alex Whitehouse of Whitehouse Wealth Management, some of the highest trading fees out there can reach $30 per transaction. Obviously, paying this amount per trade can take a toll on the value of your investments and your portfolio over time.

And if you use a financial advisor who wants to trade on your behalf without prior approval, be afraid. If you aren’t sure how many trades you’re making and leave all the decisions in the hands of someone else, you could easily wind up forking over outrageous sums of money for trades that should be fairly inexpensive to make.

“You should always know how much each buy and sell trade costs, and how often trades occur in your account,” says Whitehouse.

Exit Fees

Some companies charge exit fees when you transfer your investment account to another financial institution. In other words, your current financial advisory firm may try to charge you a fee for taking your business elsewhere.

Unfortunately, this could be more common than you think, as most major brokerage firms you know by name are notorious for trying to slide these fees in.

On the plus side, it’s possible to get around them, says San Diego-based financial advisor Taylor Schulte. “Eight or nine times out of 10, they’ll reverse that charge if you simply ask them to do so.”

If you see an exit fee show up on your statement, Schulte says, the first thing you should do is contact the custodian and request a refund. While they can absolutely say ‘no,’ it never hurts to ask.

“If you don’t ask for a refund, you’ll never get it,” he says.

The Bottom Line

If you want your investments to reach their potential, it’s crucial to watch out for ridiculous investing fees that eat away at your returns without adding real value. If you don’t, you’re bound to overpay for services you could pay less for elsewhere.

And if you don’t think the trouble is worth it, keep in mind that even small fees can add up, especially if you give them enough time. As the Securities and Exchange Commission (SEC) notes, even 0.25% in added fees can cut the return on a $100,000 portfolio by $10,000 over 20 years. Paying 0.75% too much on the same portfolio can cost you $30,000 in returns over 20 years.

The difference is too big to ignore, which is why you should strive to become an informed consumer. Before you invest your money, make sure you know what fees you’re paying and why. Ask questions, read your statements thoroughly, and question your financial advisor about any fees that seem dubious.

While this kind of research takes time and effort, ignoring your investing fees could easily set you back tens of thousands of dollars by the time you’re ready to retire.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.

Related Articles:

What is the craziest investing fee you’ve ever seen? How do you ensure you’re not overpaying for professional financial advice?

The post Outrageous Investing Fees You Should Never, Ever Pay appeared first on The Simple Dollar.



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