You might know that nothing in life is free, but do you know the true costs of your investments? Unfortunately, many of the costs associated with mutual funds, annuities, and other financial products are hidden in the fine print...if they're even disclosed at all!
Here are some of the common hidden costs you're likely to find in the financial world.
Mutual Fund Expense Ratios
Expense ratios measure the cost of
investing in a fund. They are deducted daily before performance figures are reported and will directly reduce your investment returns. The average mutual fund expense ratio is around 1.4%, meaning that
the average fund charges investors 1.4% per year. There are plenty of great mutual funds with very low expense ratios, so don't think that you have to "pay for performance" when investing.
Mutual Fund 12B-1 Fees
12B-1 fees are used to compensate advisors and don’t benefit you directly. They start at 0.25% per year and go up to
1.00% which is the highest allowed by law. When looking for a fund, keep in mind that not all mutual funds charge 12B-1 fees. True no-load mutual funds don’t
have a 12B-1 fee higher than 0.25% and many don’t have one at all!
Sales Commissions (Sales Loads)
Most financial advisors receive sales commissions (sales loads) from the products they recommend. (See my post about mutual fund commissions here.) Not only are commissions a potential conflict of interest, but they also make it hard to determine the true cost of advice since most of them aren't disclosed. The only way to be sure to avoid these hidden costs is to work with a fee-only advisor that never receives sales commissions.
Lower Returns
Don't let an advisor try to convince you that you won't pay the sales commission that he or she will receive from a mutual fund, insurance policy, or other product. That money will come from you one way or another! If the commission isn't deducted from your initial investment, then your future returns will likely be lower than they otherwise would be in order to make up for the commission paid your advisor.
Surrender Charges
Products that pay sales commissions to advisors often have a surrender charge that take effect if you sell the product within a certain time frame. I frequently see annuities and life insurance policies with surrender charges that last for 7 to 10 years or more! Although you won't pay surrender charges if you leave your money alone, they do restrict how soon you can move your money without losing a portion of your investment.
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.
