Nov 21, 2017

Beware Those Hidden Investment Costs

By Byron Ellis

What do you pay for your investments and investment advice? Do you know the most common answer I hear when I ask this question? You guessed it. “I don’t know." You should know how much you pay.

I believe the financial industry is to be blamed for consumers not knowing what they really pay. Our industry may have been guilty of not making all the charges and fees clear, which may have resulted in many people thinking they don’t pay anything at all! Shame on us but shame on those that think they are really getting something for free.

What expenses should you know and ask about when investing?

  1. Internal costs: These are the costs that you may not notice on your statement. You may need to do a little digging to find out what these costs are. Internal costs can include manager’s fees, trading costs, 12b-1 fees, marketing costs, and more. The bottom line is that this number can be anywhere from zero to over 2 percent. Investments have a cost and it is your duty to make sure it does not erode your returns. An easy way to see what your investments internal costs are is to look up your investment on Yahoo finance or some other financial web site. You can also type in the ticker symbol into your search field your browser will usually find a site with the information that you need. Once you find your investment, look for the annual expense ratio to see what your investment’s internal costs are as a percentage of the value.
  2. Trading costs: Trading costs are not included in the internal cost. Trading costs can vary greatly with the company and the strategy of the investment. Investment companies are not required to report this number and there is not an agreement in the industry on how to actually calculate it. Needless to say, the higher an investment’s turnover the higher the trading cost. In the end, if a fund’s performance is good, which is the return net of the costs, the trading costs may not be that critical. However, if you can find an investment that can quantify the trading costs, and some do, you may be a step ahead of the game.
  3. Management costs for your adviser: This is one that most people are aware of. This is usually a percentage of assets and typically taken out of your investment and stated on your statement. The industry average is around 1% but can vary depending on the company you are working with and the amount of money invested. This cost typically will be reduced as your account gets bigger. Make sure you understand that you may be able to deduct this fee for your non-IRA accounts so make sure you pass the information on to your tax preparer.

If you do not know what you really pay, I suggest asking your adviser. Armed with the right information you can make good decisions regarding your portfolio.

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