Understanding Your “Hidden” Investment Costs
In this low interest rate environment and with the stock market having tanked, saving a dollar can be easier than making one. Depending upon the size of your portfolio, cutting your investment costs could save you a bundle.
One client recently said, “What investment cost? I don’t pay any costs.” What he meant was that he did not know he was paying the costs. Most people do not know about the fees often associated with investments and their impact, so lets review.
Commissions are paid when many investments are purchased, and they can apply to individual stocks, limited partnerships and many mutual funds. Individual bonds usually have a markup that the client never sees.
When investors purchase mutual funds, many do not know that there are two primary types: those that pay commissions to the salesperson and those that do not, known as “no load.”
There are at least three different classes of commissionable shares. “A” class shares have commissions as high as 5 1/2 percent. “B” class shares do not have a commission upfront, but they have a backload that is deducted if you liquidate the fund in the first several years. They also have a higher annual cost than the “A” class shares. “C” class shares have no front-end commission and a limited one-year backend load (should you leave early), but they have higher annual expenses than the other two classes.
A “no load” fund will always provide a higher return than those paying commission (all else being equal) and should be considered the best type of choice.
Many mutual funds also have annual marketing or distribution fees and are considered an operational expense, which can be as high as 1 percent.
Keep in mind that every time a sale occurs when commissions are involved, there is a conflict of interest between what is best for the client and what is best for the salesman and the company. To avoid this situation, clients would be well-served to work with financial advisers who do not sell product.
Other fees that are often charged can include account fees, statement fees, wiring fees, distribution fees, redemption fees and account closure fees or management fees.
In this current financial environment, now is a great time to learn about what fees you pay and to trim your investment costs, thereby keeping more dollars in your pocket. Money magazine, Kiplinger Personal Finance, CNN Money, MorningStar, MSNBC, Newsweek and AARP recommend readers go to www.garrettplanningnetwork.com or www.napfa.org for a list of “fee only” advisors in your area who can recommend investments that do not pay commissions.