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.
Showing posts with label commissions. Show all posts
Showing posts with label commissions. Show all posts
Tuesday, July 31, 2012
Saturday, July 11, 2009
Top Myths About Investing
Myth 1: Investing is too risky.
Investing in the stock market - and, to a lesser extent, in the bond market - can be risky, especially if you don't know what you're doing! However, not investing in stocks and bonds can be just as risky.
For example, vehicles that most investors consider safe – like savings accounts, CDs, and fixed annuities – don’t keep up with inflation over long time periods. This makes it virtually impossible for most people to save enough in these types of accounts and investments to accomplish big financial goals like retirement.
For large financial goals that are years away, investors need to consider the growth potential of stocks. But, to reduce stock market risk, it's important to diversify stock holdings using vehicles like mutual funds and exchange-traded funds (ETFs) that follow sound investment strategies.
Myth 2: My advisor can help me pick the best investments.
Be leery of any advisor that suggests he or she can pick investments that will outperform the market. The investments recommended by many advisors carry high expenses and commissions that can lower your investment return, and an active trading strategy can lead to a higher tax bill.
If you would like help picking or managing investments, look for a fee-only advisor that doesn't make a living 'selling' investments. Fee-only advisors charge fees for advice, meaning that they don't have incentives to recommend an investment unless they believe it is the absolute best option for you.
Two organizations that represent fee-only advisors are the Garrett Planning Network (www.GarrettPlanningNetwork.com) and the National Association of Personal Financial Advisors (www.NAPFA.org).
Myth 3: Investment performance is the most important factor to help me reach my goal.
Investment performance is important, but you should place primary importance on the things you can control. The first thing you can control is the amount you save. Saving and investing more will increase the chance you'll reach your financial goal. Second, you should focus on controlling costs. Higher cost investments often underperform over time. And third, always follow a clearly defined investment strategy rather than basing your investment decisions on tips from friends or your hunches.
Myth 4: I need to be in a hedge fund to make money.
Hedge funds have three “highs” that make them unsuitable for most investors: high minimums, high costs, and a high failure rate. It’s not uncommon for the minimum investment to be $1M or more, and once in the investment you’ll often pay expenses of 2% per year plus 20% of profits. As far as the failure rate, a study by the European Central Bank found that some hedge fund strategies have annual failure rates of over 14% per year.
While it's not as sexy and exciting as a hedge fund, a diversified portfolio of low-cost mutual funds and ETFs that has a mix of stocks and bonds is best for most investors.
Myth 5: Smart investors buy gold.
Gold gets a lot of attention during times of market volatility. Gold doesn't pay dividends, so any potential return will be from 100% price appreciation. So for an investment in gold to be profitable, you have to buy it in advance of market volatility before the price has risen. And if the price of gold drops, you won't receive any dividends to help cushion the fall.
While gold can be a good short-term hedge, historically it’s been a horrible long-term investment and at times it has been much more volatile than the stock market. At most, gold is a short-term speculative investment and most people are fine without it.
Myth 6: I’m too young to start planning for retirement.
Actually, the earlier you start the better because your investments will have more time to compound and grow, making it much easier to reach your goal. If you wait too long, you might end up having to rely on Social Security and lower your ideal standard of living in retirement. So follow our motto: "invest early, invest often".
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.
Investing in the stock market - and, to a lesser extent, in the bond market - can be risky, especially if you don't know what you're doing! However, not investing in stocks and bonds can be just as risky.
For example, vehicles that most investors consider safe – like savings accounts, CDs, and fixed annuities – don’t keep up with inflation over long time periods. This makes it virtually impossible for most people to save enough in these types of accounts and investments to accomplish big financial goals like retirement.
For large financial goals that are years away, investors need to consider the growth potential of stocks. But, to reduce stock market risk, it's important to diversify stock holdings using vehicles like mutual funds and exchange-traded funds (ETFs) that follow sound investment strategies.
Myth 2: My advisor can help me pick the best investments.
Be leery of any advisor that suggests he or she can pick investments that will outperform the market. The investments recommended by many advisors carry high expenses and commissions that can lower your investment return, and an active trading strategy can lead to a higher tax bill.
If you would like help picking or managing investments, look for a fee-only advisor that doesn't make a living 'selling' investments. Fee-only advisors charge fees for advice, meaning that they don't have incentives to recommend an investment unless they believe it is the absolute best option for you.
Two organizations that represent fee-only advisors are the Garrett Planning Network (www.GarrettPlanningNetwork.com) and the National Association of Personal Financial Advisors (www.NAPFA.org).
Myth 3: Investment performance is the most important factor to help me reach my goal.
Investment performance is important, but you should place primary importance on the things you can control. The first thing you can control is the amount you save. Saving and investing more will increase the chance you'll reach your financial goal. Second, you should focus on controlling costs. Higher cost investments often underperform over time. And third, always follow a clearly defined investment strategy rather than basing your investment decisions on tips from friends or your hunches.
Myth 4: I need to be in a hedge fund to make money.
Hedge funds have three “highs” that make them unsuitable for most investors: high minimums, high costs, and a high failure rate. It’s not uncommon for the minimum investment to be $1M or more, and once in the investment you’ll often pay expenses of 2% per year plus 20% of profits. As far as the failure rate, a study by the European Central Bank found that some hedge fund strategies have annual failure rates of over 14% per year.
While it's not as sexy and exciting as a hedge fund, a diversified portfolio of low-cost mutual funds and ETFs that has a mix of stocks and bonds is best for most investors.
Myth 5: Smart investors buy gold.
Gold gets a lot of attention during times of market volatility. Gold doesn't pay dividends, so any potential return will be from 100% price appreciation. So for an investment in gold to be profitable, you have to buy it in advance of market volatility before the price has risen. And if the price of gold drops, you won't receive any dividends to help cushion the fall.
While gold can be a good short-term hedge, historically it’s been a horrible long-term investment and at times it has been much more volatile than the stock market. At most, gold is a short-term speculative investment and most people are fine without it.
Myth 6: I’m too young to start planning for retirement.
Actually, the earlier you start the better because your investments will have more time to compound and grow, making it much easier to reach your goal. If you wait too long, you might end up having to rely on Social Security and lower your ideal standard of living in retirement. So follow our motto: "invest early, invest often".
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.
Thursday, July 9, 2009
Top Myths About Financial Advisors and Financial Planners
Myth 1: You have to meet strict requirements before calling yourself a financial advisor or financial planner.
There aren’t any requirements to meet before you can call yourself an “advisor” or “planner”, so don't assume that someone using the title "financial advisor" or "financial planner" has the necessary qualifications to "advise" or "plan" anything! Most people that use those terms are really just salespeople.
If you want to make sure your financial advisor has proven qualifications, then look for someone with the CERTIFIED FINANCIAL PLANNER(TM), or CFP® , designation. These individuals have put in hundreds of hours studying for an intense two-day examination, undergone background checks, agreed to a abide by a code of ethics, and are subject to continuing education requirements.
Myth 2: A financial advisor will try to sell me something.
Most advisors do earn their living by “selling” investments and insurance products and have to get there clients to buy something in order to make money. This can lead to conflicts of interest.
You can eliminate this conflict of interest and make sure your advisor is focused on “advice” rather than “sales” by working with a fee-only advisor that doesn’t accept commissions from his or her recommendations. This places the focus on advice rather than sales.
Myth 3: My financial advisor does my planning for free.
There’s no such thing as a free lunch. An advisor that does “free” planning likely earns commissions from his or her recommendations. While commissions aren’t inherently bad, they can lead an advisor to recommend something that might be better for his or her pocket than yours.
A lot of the products that are recommended as the result of "free" financial advice carry high commissions, fees, and surrender charges that can negatively impact your future investment returns. On the other had, fee-only advisors that charge for their advice and don't have any financial incentives to recommend one product over another, are free to recommend the best, lowest cost alternative to you.
Since "free" planning can end up costing you thousands more over time, make sure you focus on the "total cost" of your financial planner's advice rather than only focusing on what you pay out-of-pocket.
Myth 4: My financial advisor has to put my interests first.
Only advisors that are held to a “fiduciary” standard are legally required to put your interests first. Although they are prohibited from using deceptive sales practices, brokers and insurance agents are not held to a fiduciary standard.
Unlike other financial advisors, Registered Investment Advisors are held to a fiduciary standard and are legally obligated to put their clients' interest above their interests and the interests of their firm. Go to www.FocusOnFiducuiary.com to lean about the fiduciary standard and why it's important.
Myth 5: Only wealthy people need financial advisors.
If anything, people that aren’t already wealthy need sound financial advice because they can’t afford to make mistakes with their money and a financial planner can help them avoid costly mistakes and stay on the right track financially.
While many financial advisors focus on attracting only wealthy clients, there are many top-notch advisors that reach out to the "middle market". Look for a fee-only advisor that works on an hourly basis, since an advisor that bills for his or her time is less likely to care about your net worth or investable assets.
Go to www.GarrettPlanningNetwork.com to find a fee-only advisor that bills on an hourly basis near you.
Myth 6: “Fee-only” and “fee-based” advisors are the same.
These terms aren’t interchangeable! Don't be fooled by Wall Street's attempt to blur the line between "fee-only" and "fee-based"!
“Fee-based” should really be called “fees and commissions” since fee-based advisors earn a fee when you hire them and receive commissions from the products they recommend (read: "sell")! On the other hand, fee-only advisors never receive commissions from their recommendations, so this huge conflict of interest is removed.
Myth 7: A financial advisor looks at all areas of my finances.
Many advisors only look at a limited area of your finances – like investments or insurance – so if you want a comprehensive planning, it’s important to find an advisor that has the appropriate qualifications and experience to analyze all areas of your finances, from cash flow, to retirement, tax, and estate planning.
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.
There aren’t any requirements to meet before you can call yourself an “advisor” or “planner”, so don't assume that someone using the title "financial advisor" or "financial planner" has the necessary qualifications to "advise" or "plan" anything! Most people that use those terms are really just salespeople.
If you want to make sure your financial advisor has proven qualifications, then look for someone with the CERTIFIED FINANCIAL PLANNER(TM), or CFP® , designation. These individuals have put in hundreds of hours studying for an intense two-day examination, undergone background checks, agreed to a abide by a code of ethics, and are subject to continuing education requirements.
Myth 2: A financial advisor will try to sell me something.
Most advisors do earn their living by “selling” investments and insurance products and have to get there clients to buy something in order to make money. This can lead to conflicts of interest.
You can eliminate this conflict of interest and make sure your advisor is focused on “advice” rather than “sales” by working with a fee-only advisor that doesn’t accept commissions from his or her recommendations. This places the focus on advice rather than sales.
Myth 3: My financial advisor does my planning for free.
There’s no such thing as a free lunch. An advisor that does “free” planning likely earns commissions from his or her recommendations. While commissions aren’t inherently bad, they can lead an advisor to recommend something that might be better for his or her pocket than yours.
A lot of the products that are recommended as the result of "free" financial advice carry high commissions, fees, and surrender charges that can negatively impact your future investment returns. On the other had, fee-only advisors that charge for their advice and don't have any financial incentives to recommend one product over another, are free to recommend the best, lowest cost alternative to you.
Since "free" planning can end up costing you thousands more over time, make sure you focus on the "total cost" of your financial planner's advice rather than only focusing on what you pay out-of-pocket.
Myth 4: My financial advisor has to put my interests first.
Only advisors that are held to a “fiduciary” standard are legally required to put your interests first. Although they are prohibited from using deceptive sales practices, brokers and insurance agents are not held to a fiduciary standard.
Unlike other financial advisors, Registered Investment Advisors are held to a fiduciary standard and are legally obligated to put their clients' interest above their interests and the interests of their firm. Go to www.FocusOnFiducuiary.com to lean about the fiduciary standard and why it's important.
Myth 5: Only wealthy people need financial advisors.
If anything, people that aren’t already wealthy need sound financial advice because they can’t afford to make mistakes with their money and a financial planner can help them avoid costly mistakes and stay on the right track financially.
While many financial advisors focus on attracting only wealthy clients, there are many top-notch advisors that reach out to the "middle market". Look for a fee-only advisor that works on an hourly basis, since an advisor that bills for his or her time is less likely to care about your net worth or investable assets.
Go to www.GarrettPlanningNetwork.com to find a fee-only advisor that bills on an hourly basis near you.
Myth 6: “Fee-only” and “fee-based” advisors are the same.
These terms aren’t interchangeable! Don't be fooled by Wall Street's attempt to blur the line between "fee-only" and "fee-based"!
“Fee-based” should really be called “fees and commissions” since fee-based advisors earn a fee when you hire them and receive commissions from the products they recommend (read: "sell")! On the other hand, fee-only advisors never receive commissions from their recommendations, so this huge conflict of interest is removed.
Myth 7: A financial advisor looks at all areas of my finances.
Many advisors only look at a limited area of your finances – like investments or insurance – so if you want a comprehensive planning, it’s important to find an advisor that has the appropriate qualifications and experience to analyze all areas of your finances, from cash flow, to retirement, tax, and estate planning.
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.
Mutual Fund Costs and Share Classes
Most of us are hard-wired to perceive high-cost items as being more valuable than lower-cost alternatives. While that might be true in some areas of life, when it comes to investing in mutual funds, selecting funds with low expenses is a great way to increase your chance of investing success.
Numerous studies have shown that mutual funds with low expenses tend to outperform funds with high expenses over time.
The world of mutual fund investing can be broken down into two groups: no-load (no commission) funds and loaded (commission) funds. No-load funds charge an expense ratio that includes a management fee and 12b-1 fee, although many no-load funds don’t charge 12b-1 fees. Loaded funds - classified as either A, B, or C shares - charge expense ratios and pay various types of commissions to the advisors that sell them.
Expense Ratio: Includes the management fee and any 12b-1 fee that is charged. All mutual funds will have an expense ratio.
Management Fee: Pays the fund manager and covers record keeping, accounting, auditing, and other expenses. All mutual funds will have a management fee.
12b-1 Fee: A sales charge that is paid to the selling agent to cover marketing of the fund. By law, no-load funds can’t charge a 12b-1 fee over 0.25%, but loaded funds can accept 12b-1 fees.) All loaded funds will have 12b-1 fees, but many no-load funds will not have 12b-1 fees
Loaded mutual funds (funds that charge commissions) will be classified as A, B or C shares.
Class A Shares: Charge an up front commission, deducted from your initial investment, that usually starts around 5.75%. Discounts, or “breakpoints”, are available under certain circumstances. A shares can be “load waived” as well, meaning the front end load is waived, but 12b-1 fees still apply.
Class B Shares: Charge a back-end commission starting around 5% that declines over 5 to 10 years until eliminated. B shares charge a high 12b-1 fee to compensate for the commission paid to the selling agent.
Class C Shares: Usually charge a 1% back-end load if sold within the first year. C shares charge a 12b-1 fee of 1.00% that goes to the selling agent. Don’t let an advisor tell you that a Class C share is a “no-load fund”! It isn’t!
Now that you know the various fees charged by mutual funds, you can look at your portfolio and figure out what you’ve been paying.
My advice is to avoid loaded mutual funds in favor of no-load funds with low expense ratios and no 12b-1 fees. Those are the types of funds I purchase for myself and recommend to my clients.
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.
Numerous studies have shown that mutual funds with low expenses tend to outperform funds with high expenses over time.
The world of mutual fund investing can be broken down into two groups: no-load (no commission) funds and loaded (commission) funds. No-load funds charge an expense ratio that includes a management fee and 12b-1 fee, although many no-load funds don’t charge 12b-1 fees. Loaded funds - classified as either A, B, or C shares - charge expense ratios and pay various types of commissions to the advisors that sell them.
Expense Ratio: Includes the management fee and any 12b-1 fee that is charged. All mutual funds will have an expense ratio.
Management Fee: Pays the fund manager and covers record keeping, accounting, auditing, and other expenses. All mutual funds will have a management fee.
12b-1 Fee: A sales charge that is paid to the selling agent to cover marketing of the fund. By law, no-load funds can’t charge a 12b-1 fee over 0.25%, but loaded funds can accept 12b-1 fees.) All loaded funds will have 12b-1 fees, but many no-load funds will not have 12b-1 fees
Loaded mutual funds (funds that charge commissions) will be classified as A, B or C shares.
Class A Shares: Charge an up front commission, deducted from your initial investment, that usually starts around 5.75%. Discounts, or “breakpoints”, are available under certain circumstances. A shares can be “load waived” as well, meaning the front end load is waived, but 12b-1 fees still apply.
Class B Shares: Charge a back-end commission starting around 5% that declines over 5 to 10 years until eliminated. B shares charge a high 12b-1 fee to compensate for the commission paid to the selling agent.
Class C Shares: Usually charge a 1% back-end load if sold within the first year. C shares charge a 12b-1 fee of 1.00% that goes to the selling agent. Don’t let an advisor tell you that a Class C share is a “no-load fund”! It isn’t!
Now that you know the various fees charged by mutual funds, you can look at your portfolio and figure out what you’ve been paying.
My advice is to avoid loaded mutual funds in favor of no-load funds with low expense ratios and no 12b-1 fees. Those are the types of funds I purchase for myself and recommend to my clients.
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.
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