During the bull market, you could get away with a lot of minor mistakes. Now, though, you have to safeguard every penny. You won't balance your budget by buying a Maserati just to get to the grocery store and back. By the same token, there's just no reason to pay for premium investing services you don't need, much less use.
In recent years, many financial professionals have found ways to raise fees and other charges and ensure a steady stream of income for their firms. In doing so, they've often focused on services that their clients don't even use. Given that many people start investing with an advisor's help, it's unfortunate that they often come to regret the experience.
There's no shortage of ways that financial professionals collect money from their clients. The following are just a few.
Sold as a way to save on brokerage commissions, wrap accounts let advisors instead collect a quarterly or annual fee based on a percentage of your total assets. But if you don't trade often, paying as much as 3% of your account balance annually is highway robbery.
Many mutual funds charge investors up-front fees to buy shares. The $128 billion Growth Fund of America (AGTHX) from American Funds, for instance, charges as much as 5.75% to new investors. Yet some investors, such as those who have access to load-waived retirement plan accounts, don't have to pay. If you're paying that front-end load, less than $0.95 of every dollar you invest actually goes toward buying shares of Oracle (Nasdaq: ORCL ) , Lowe's (NYSE: LOW ) , Medtronic (NYSE: MDT ) , and all the other stocks in which the Growth Fund invests. The rest goes to whoever sells you the fund, or to the fund company itself, if you buy shares directly.
Originally established as a way to allow funds to cover costs of marketing and distribution, 12b-1 fees often provide supplemental revenue for fund companies. Even funds that are closed to the public -- and therefore don't need to market themselves -- sometimes charge these fees, including funds from Goldman Sachs (NYSE: GS ) and Janus Capital (NYSE: JNS ) .
Adding insult to injury, some firms add on a host of nickel-and-dime fees to the more substantial charges they make. For instance, you may pay annual custodial fees for IRA accounts, low-balance fees if you fail to meet a certain minimum, inactivity fees if you don't make trades that generate enough in commissions, or market data fees to receive real-time stock quotes or other information.
Occasionally, firms have gotten in trouble over inappropriate fees. Morgan Stanley (NYSE: MS ) , for instance, paid more than $6 million in fines to the NASD three years ago for charging asset-based fees for clients who would have been better off in a transaction-based account. More recently, UBS (NYSE: UBS ) settled a similar case with the New York Attorney General's office for $23 million in restitution and fines.
Give yourself a break!
In this era of competition among financial-services firms, you don't need to settle for excessive fees. By simply looking for the best deal for your own situation, you can narrow down your options and find the broker that will save you the most money. Here are some tips to consider:
- You don't have to find the absolute lowest fees. For most investors, the difference between paying $7 to trade stocks versus $10 becomes inconsequential. If you only make a few trades per year, the service your broker provides is a lot more important than saving a few bucks per commission.
- Find your comfort zone. Some discount brokers have fairly imposing trading platforms, which make it hard for novice investors to do things as simple as just buying 100 shares of a widely-owned stock. Before you invest, make sure you can do what you need to do without getting a company rep on the line -- a rep who might add extra charges for assistance.
- Go no-load. With mutual funds, paying loads or 12b-1 fees just doesn't make sense. There are thousands of good no-load funds out there, so go with the low-cost alternative -- unless you have no-fee access through a 401(k) or other special arrangement.
If you're facing big losses in your portfolio, you can't afford to waste money on silly fees. By simply saying no to fees that don't buy anything of value for you, you can save a bundle. In this economy, every dollar you can bring back to your bottom line is worth a lot.
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