“Free” Isn’t Always Fee-Free When it Comes to Your Money

Not long ago a client asked for an independent review of his investment portfolio.  He was under the impression that there were NO fees associated with his investment account and was puzzled as to why his earnings didn’t match up to the returns of the market. This is a common misnomer, as market return is never the actual return for any investor.

Legally, the broker was completely right but misleading.  He was not charging a management fee, but this led this client to believe that there were NO fees associated with his investments.  So here is a fact to remember.  There are always expenses associated with money you invest or save.  Always!

With mutual funds you must understand expense ratios.  The expense ratio is not deducted directly from your account earnings but rather the return you earn has already been adjusted to account for this fee.  Careful observation is required to appreciate the fee you are being charged with expense ratios.

Management fees or advisory fees are a different story.  These are the fees that an advisor, planner or broker charges you for managing your investment or savings.  The typical fee today is 1.09% per $100,000 under management, though many advisors and brokerage houses charge a much higher fee.  Management and advisory fees are typically taken from your account on a quarterly basis which can be tricky as they compound quickly, much like credit card interest.

Transaction fees are charged every time an order is placed to buy or sell a stock or mutual fund.  The cost of a transaction fee can run between $9.95 and $50.00 per trade.  As you can see, transaction fees add up fast. It is very important to maintain control over how often transactions (trades) are made with your funds in order to control how much you are being charged in transaction fees.

Front-End Loaded mutual funds have a cost called a commission.  If you purchase a front-end loaded mutual fund for $10.00 and it has a 5% commission, then your mutual fund shares are only worth $9.50 due to the commission fee that is charged up-front.  This can eat into your compounding growth as your growth curve is immediately shifted to the left with front-end loaded fees.

Surrender Charges (aka Back-End Loaded) can reduce your earnings because they are charged when you sell your investment.  Typically, these fees fall-off or are reduced each year you own a certain investment.  With variable and indexed annuities, as well as certificates of deposit, there are typically huge surrender charges which ensure that the cost paid to the sales force will be paid at your expense and not the insurance company’s or bank’s expense.

Custodial Fees and Accounting Fees are often charged by advisors and brokerage houses and range from $10.00 on up, annually.  There are also account closing fees which may range from $25.00 to $150.00.  Taking the time to discover and count the cost of all these fees is important BEFORE you save or invest your money, if you don’t want to lose your money.

Banks fees can be connected with “free” accounts due to the amount of money that you have to keep deposited in such accounts.  According to Bankrate, the typical balance in these accounts has to be maintained at $6,319 (in 2018) in order not to be charged a fee.  Your cost associated with these “free” accounts is your lost opportunity cost.  Even a nominal 1% lost opportunity cost becomes a real cost for you of $63.20 every year.

Then there are non-interest-bearing checking accounts that charge you a monthly fee.  Again, according to Bankrate, the typical fee for these accounts in 2018 was $5.57 per month for a minimum balance of $631.31.  The good news here is that 41% of non-interest-bearing checking accounts in 2018 don’t have a minimum balance requirement.

Overdraft fees and ATM fees are insane.  The average overdraft fee in 2018 was $33.23, up by over 35% from 1998, while ATM fees rose by 2.4% last year alone!  According to CNN Business, ATM and overdraft fees made the three top Banks in America more than $8.7 billion in 2017.  Broken down, that comes to $1.1 billion on ATM fees, $2.3 on maintenance fees, and $5.3 billion on overdraft fees.

On top of all this, the FDIC data shows that Americans are on track to pay $122 billion in credit card interest in 2019. This is up 49% over the last five years and is due to the fact that Americans carry $682 billions of credit card debt that is not paid off every month.  In fact, according to the Federal Reserve 43.8% of credit card debts revolve each month rather than being paid-in-full, while only 25.8% are paid-in-full each month. The difference represents accounts that were inactive (weren’t used.). This interest becomes yet another fee that you pay for a card that is perhaps “free”, meaning no annual fee.

Student loan debt is $521 billion more than credit card debt in America.  Furthermore, more than 1 out of 10 student loans is 90 days delinquent or in default, which makes the fees associated with student loans a tremendous burden for the 69% of college students and the 14% of parents of college students who took out student loans and are unable to pay them off.  This again is another fee that is costing Americans a lot of money.  Over 51% of college graduates report that they don’t believe their schooling has made their life any better. And now they are paying the price for that in their lifestyle.

With so many different ways that Americans are losing money it makes sense why 90% of Americans retire dependent on Social Security.  But it makes even greater sense to learn today how to stop losing money and keep more of what you make so that you don’t become part of the horrible statistic.


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