In our last post, we talked about a few hidden investment fees that many investors are paying, usually without even realizing it.
Unfortunately, that list wasn’t complete.
In this post, we continue with our list of hidden investment fees, as well as a few ways for the average investor to avoid these fees.
As a reminder, let me clarify what I mean by “hidden.”
When I refer to hidden investment fees, I’m referring to the fact that a large number of financial advisors, brokerage firms, insurance companies, third-party administrators, and record-keepers do not offer a clear, transparent, convenient, and concise way for investors to determine whether or not they are paying these fees.
Now that we’re all on the same page, let’s continue with our list of hidden investment fees.
6. High turnover rate/ratio
An investment’s turnover rate or ratio is the percentage of a fund’s holdings that are replaced or have changed in the previous year.
With stock (equity) mutual funds, a high turnover ratio is usually indicative of an investment manager who is trying to “beat the market” by attempting to outsmart the collective knowledge of millions of individual market participants.
Sounds like a great plan! So, what’s the big deal?
For starters, research has shown that this type of investment philosophy, has largely been unsuccessful and is a waste of time (check out this blog post and this one for more info on investment philosophies and why they matter).
High turnover rates, all things being equal, usually equate to higher transaction fees for the fund, which will reduce the fund’s returns.
Avoiding this hidden investment fee is simple…focus on funds that have a lower turnover rate/ratio (this information can be found in a fund’s prospectus).
Bond (fixed income) funds are a little different though, so a high turnover ratio (relative to a stock/equity fund) doesn’t necessarily mean it’s a bad fund.
That’s why it’s so important to have a relationship with a fee-only financial advisor who has a rock-solid investment strategy that’s backed up by decades of research in financial science.
This type of advisor can help you by focusing on things you CAN control, such as costs, asset allocation, and other characteristics that research has shown have a direct impact on expected returns.
7. Variable annuity & variable life insurance fees
Where do I begin? These products can be littered with dozens of hidden fees including, but not limited to…
- Surrender charges
- Mortality and expense risk charges
- Investment expense ratios of the underlying investments
- Administrative fees
- Additional cost riders
These fees can easily add up to 3-4% a year of your account balance.
This is why, for most folks, it RARELY makes sense to mix your insurance with your investments.
Typically, you can accomplish the same goals, for less cost, by avoiding these type of investment products and separating the insurance component of your financial plan from the investment component.
What if you’re already invested in one of these products?
Contact a fee-only financial advisor.
A fee-only advisor doesn’t sell any products, so they won’t be swayed by the big commissions that are typically inherent in these types of products.
These types of advisors, along with your CPA, can help you figure out your options from both a tax and investment standpoint when deciding what to do with a current variable annuity or life insurance product with high fees.
8. 401(k) recordkeeping & third-party administrator fees
Did you know that the average total fees for a small 401(k) plan were approximately 1.46% of assets in 2012?
That might not sound like a lot, but an annual fee of only 1%, compared to a portfolio with an annual fee of 0.25%, can mean a difference of almost $30,000 after 20 years, assuming a $100,000 initial investment and 4% annual investment returns (see this PDF report from the Securities and Exchange Commission for more details).
Obviously this difference would be much higher for the “average” total fee for a small 401(k) plan (i.e. the 1.46% cited above vs. the 1% in our example).
So, what can you can do if your money is in a 401(k) plan with high fees?
Unfortunately, unless you’re the one choosing the plan for your business, then you really only have a few options…
- A. Lobby your plan sponsor (i.e. employer, HR/Benefits person, etc.) for a better plan.
- B. If your employer matches your contributions up to a certain point (i.e. 50% match up to 6% of salary deferrals, etc.), then invest up to the full match, and ask for help from a fee-only financial advisor when determining the best investments for your 401(k) dollars.
- C. If your employer DOESN’T provide an employer matching contribution, then consider other retirement savings vehicles for which you might be eligible (i.e. IRA, Roth IRA, etc.) where you can possibly get access to better investment options at a lower cost.
- D. If you’re no longer with an employer, but your 401(k) money is still invested with that employer, consider rolling it over to an IRA or Roth IRA for the reasons listed in #3.
Granted, none of these options is perfect, but it beats sitting around and doing nothing while your retirement savings gets eaten away by high fees.
9. Investment advisory fees
I know what you’re thinking…
“Aren’t you an investment advisor? Why would you point this out as being a hidden investment fee?”
Yes, my firm is a registered investment adviser in the state of Oklahoma, but unlike many advisors, our advisory fees are NOT hidden.
In fact, they are listed RIGHT HERE on our website.
Do a quick Google search for “financial advisor + your city” and explore a few of the websites for the financial advisors that pop up on the first page. My guess is that most, if not all, of the advisors you check out will NOT have their advisory fees listed on their website.
Granted, many of them will tell you what their fees are if you ask them, or if you come into their office for a meeting.
But wouldn’t you rather work with someone who is clear, transparent, and upfront about what their service costs from the get-go?
I know I would.
Done with hidden investment fees?
I wish I could say that the 9 types of hidden investment fees listed in this post and the previous post are the only types of hidden fees out there, but unfortunately, that’s not the case.
The financial industry is littered with conflicts of interest and hidden fees, which makes it difficult to find someone who can provide independent and objective financial advice.
Fortunately, there is a better way.
When you work with a fee-only financial advisor who acts as a fiduciary (like SageOak), you receive financial advice that is…
- Independent and objective
- Plain and simple
- Clear and transparent
In addition, arming yourself with a little information can go a long way in helping you lower your investment expenses. The lower an investment’s expenses, the more of an investment’s total return you get to keep.
And that is something even the most oblivious investor will probably notice.
If you’d like a complimentary evaluation of your current investments (and any hidden fees you might be paying), click the button below to schedule a complimentary 15-30 minute initial phone call.