For more tales of financial frights, our Halloween special series, Avoid These 8 Investing Horror Shows, won't disappoint!
Trying to figure out how to invest your money can be scarier than a night of werewolves, ghosts, and goblins. That's why it's so comforting to find a range of professional investors willing to help you decide where to put your hard-earned cash to work.
But just like in those bad B-horror movies, it's often the person who looks like your friend who ends up stabbing you in the back. What most financial institutions do isn't nearly so gruesome, and it's a lot more subtle, but the impact is the same: Money gets sucked out of your account like blood by a vampire.
Let's take a look at a few of the many ways you need to defend yourself against Wall Street's worst tricks.
The lucrative business of helping you
The first investment that many people make is in a basic mutual fund. Few things could be simpler: Hand over your money to a fund manager, who then picks investments based on the objectives of that particular fund. Even better, you never have to write a check to pay the manager. It's almost as though it's a free service.
But as investors quickly discover, few things are truly free. With mutual funds, companies take a cut of your income to pay management fees and other fund expenses. If the income isn't sufficient, then they'll take a piece of your principal, selling investments if necessary to raise the needed cash.
Often, the amount doesn't look very big, sometimes amounting to less than 1% of fund assets every year. But that adds up, especially for major fund companies. Over the past 12 months, AllianceBernstein
And that's just for companies that are predominantly fund managers. Wall Street firms Goldman Sachs
Moving to an ETF world
The profit opportunities aren't limited to mutual funds. Even with lower expenses, ETFs are a big moneymaker for Wall Street.
For instance, last year, BlackRock
There's nothing wrong with financial professionals trying to earn a living. But drawing this much money from investment returns that have been pretty much nonexistent over the past 10 years adds insult to injury. Moreover, the hidden nature of these fees forces you to be constantly on your guard.
A host of horrors
What's even scarier is that mutual funds and ETFs are among the easiest to understand when it comes to costs. Try to buy more complicated products like variable annuities or other insurance products, and you'll have to navigate even more types of fees for various optional add-ons. Again, some of those features may be well worth the price you pay, but the problem is that it's so difficult just to figure out what those costs are. At least with fee-only financial planners, you find out upfront what they're going to cost you.
In the end, it's up to you to decide whether your financial advisor is truly earning the money you pay. Just don't expect the slow flow of money out of your accounts to be as obvious as a chain-saw-wielding dude wearing a hockey mask.
Looking for additional scary stories? We've got what you need in our Halloween special series, Avoid These 8 Investing Horror Shows.