When you get your investment statements, there’s no line that says, “Here’s how much you paid in total fees this period.” So, how do you figure out how much money you’re spending on your investments, and how do you decide if that amount is reasonable or appropriate? In this week’s episode, Devin and John talk about the types of fees you might be paying, and how you can figure out what they are, and what’s realistic in terms of how much you should be paying.
There are three basic ways to purchase investments:
You go to an old-school broker and pay a commission. Sometimes they may have various designation. You can pay up to 5.75% in front-end commission, paid to the broker when you purchase the investment.
Both John and Devin agree: If you’re still doing it that way, you need to make a change.
John points out that there is another major industry that is commission-based: car salesmen. Buying a car is horrible, and we’re all aware that they’re selling a product based upon the commission that could be generated. And because of this, you know that you have to be skeptical of anything a car salesman says. There’s a natural conflict of interest, and everybody knows it in the car-buying game. But for some reason, many people don’t see the same inherent conflict of interest in commission-based investments.
Hire a financial advisor and pay them an annual fee for their services. You’ll pay them a set amount, either by the hour or as a percentage of your investments. In return, you should get on-going financial planning advice.
The average asset-under-management fee is just a smidge over 1%. At least once a quarter, you’ll see these fees on your statement.
In addition to the advisory fee, there are internal costs of the investments themselves. These can get very expensive, and you never see these on a statement. It’s taken out of your performance before you ever even see it, making any gains smaller and any losses larger.
If you don’t require the on-going advice of a financial planner. Make your own decisions and make your own financial purchases. You’re still going to have these expenses in your investments, but you’ll eliminate the cost of the advisor.
What Are Your Costs?
So, how can you figure out how much you’re paying in expenses? You can ask your advisor, but it is possible that they could be a little defensive. There is an investment research company called Morningstar®. If you go to their website, Morningstar.com, you can enter your portfolio and it will show your expenses.
You’re not trying to get your expenses to zero, because that’s just not possible. But you can frequently decrease your expense ratio by changing how you pay your advisor and choosing investments that have lower internal costs. There is no reason to pay too much for the investments in your portfolio.
- The surprisingly large difference in returns with different expenses
- How human nature can override the best intentions of an advisor
- When a financial advisor is a good idea
Resources mentioned in this episode:
Morningstar.com website: www.Morningstar.com
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Once a month, Devin and John answer listener questions. Send your questions to firstname.lastname@example.org. They can’t answer every email or question, but they sure do try!