How Much Are You Paying in Fees?
Fees. It just sounds like a dirty word, doesn’t it? No one likes paying fees. I certainly do not. But is it crazy to think we pay fees all of the time? They go by different names – service charge, bills, expense, etc. – but, at the end of the day, they are fees. We pay a fee for our electric, natural gas, cable, cell phone, trash, etc. But we’re never concerned about those fees, are we? I’m not, at least.
That’s because I am getting something in return that I want, which adds value to my life. So, what is the problem? Why are so many people concerned about the fees they pay in their financial service? And, do they even understand how much they are paying?
This article will look at what fees are, what names they are disguised under, and how you can determine what you are paying. If you have ever wondered how much you were paying for your financial services, you are about to find out.
First, we need to get a clear definition of the word “fee”. According to Dictionary.com, a fee is:
- A charge or payment for professional services: a doctor’s fee.
- A sum paid or charged for a privilege: an admission fee.
Okay, so far, so good. Those are transparent charges, and I know what product or service I’m getting in return. But, if that’s the definition of a fee, then what keeps people from really understanding what they’re paying in fees for financial services?
Typically, without fail, when a client asks me, “what are the fees” in a strategy that I have presented them, I can quickly point to it on the page and say, “x%.” It’s right there in black and white. And that is if there even is a fee. The majority of my products have no fees associated with them. The only product I represent with an expense would be an annuity with an income rider. But at least you know what you are getting in return for that expense – a guaranteed income that you and your spouse cannot outlive and has no risk to the stock market. Plain and simple. Amazingly easy to understand. Again, I have no issue paying a fee if I know exactly what the fee is associated with and how that product or service will improve my life.
When I ask in return, “what are you paying in fees now?” I get the standard answer of “1%.”
“Are you sure?”
“Well, that’s what my ‘guy’ told me I was paying.”
This is so common it’s laughable. Most people have no clue what they are paying in fees, and I can assure you, it’s not because they are foolish. The whole system is designed to be confusing and to mask these fees as much as possible. The average fee for managed money is going to be around 2%. That may not seem like a huge difference, but that extra 1% can be monumental. We will address the compounding effects of fees in a future article. For today, let’s take a look at some of the names of these different fees so you can be prepared to get an accurate picture of what you are truly paying.
Here is a list of 16 different terms for fees that have been found in managed money accounts:
– Plan Administration Fees
– Investment Advisory Fees
– Expense Ratios of Mutual Funds
– Load Fees
– Bid-Ask Fees
– Variable Annuity Fees (Average of 3.75%)
– Commission Fees
– Retail Fund Fees
– 12 b-1 Marketing Fees (this term upsets me the most. This is simply an advertisement fee that you are paying so they can attract more clients to pay them more fees.)
– Wrap Fees
– Transaction Expense or Cost
– Revenue Sharing Fees
– Account Charges
– Redemption Fees (these companies definitely need redemption!)
– Deferred Sales Charges
That’s a lot of fees! Did you think these financial executives living in $20 million apartments and taking their private helicopters to their $30 million beach homes deserve a 1% management fee? What is the worst part of this whole system? You still pay the fee when they lose your money! In fact, I have a client who was paying 4.1% on just one of their investments. It is ridiculous!
Today I am challenging you to find out what you are actually paying in fees. Some of you will be pleasantly surprised if you have an honest financial planner that has put you in low-expense funds. Some of you will be thoroughly enraged, and you should be. This is your money. You worked your whole life for your retirement savings. You should do everything you can to protect and preserve it!
How do you find out what you are paying in fees? The first thing you need to do is to ask for the “Statement of Additional Information.” This statement will only be provided if you request it. Another way is to look up the funds you currently hold with your financial planner by googling the fund’s prospectus. Once you have the fund information (100-400 pages) on your screen, you can press CTRL-F. This will prompt a word search in the document, start by typing in the different fees listed above.
Suppose you have ever had that feeling in your gut that something is just not right. And feel you should be further ahead with your nest egg than your statement shows, but you cannot figure out why you are not. You should contact a financial advisor to walk you through the paperwork. In some occurrences, there are no fees associated with your retirement strategy, but it is always better to know exactly what you are paying. Most importantly, you want to be assured your money will be completely protected from market losses. That alone can save you tens of thousands of dollars per year, or even hundreds of thousands over a lifetime.