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 no-load. Show all posts
Showing posts with label no-load. Show all posts
Tuesday, July 31, 2012
Monday, February 21, 2011
Five Rules for Investment Success
Rule 1: Lower Your Investment Costs
Rather than wasting time worrying about things beyond your control - like the direction of the stock market, interest rates, or inflation - focus on things you can control in order to improve your odds of investment success. A simple thing to control is the cost of your investments.
You can reduce your investment costs by choosing “no load” mutual funds over funds that pay sales commissions. After all, how does paying a 5.75% upfront commission improve the odds that a fund will make you money? Another easy way to control your costs is to select mutual funds with lower than average expense ratios. (You can read more about mutual fund expenses and fees in a previous post here).
Rule 2: Know What You're Paying for Advice
Another thing you can control in the investment world is how much you're paying for financial advice. Make sure your advisor discloses all sources and amounts of income so you know exactly what you're paying. You might be surprised at how much the "free advice" you receive from your broker is costing you! (FYI - The hidden costs (i.e. sales commissions) of annuities and life insurance can be especially high.)
You can avoid hidden costs by working with a "fee-only" advisor. Unlike advisors that use the term "fee-based", "fee-only" advisors are paid directly by their clients, never receive sales commissions, and have an incentive to recommend low cost investments and insurance. (See if your advisor would be willing to sign a Fiduciary Statement like the one I use here.)
Rule 3: Ignore Your Emotions
All of us are familiar with the saying “buy low, sell high”, but following your emotions when you invest usually leads to doing the opposite. Think twice before going along with the crowd during manias like the dot-com boom and avoid panicking during market declines. Make sure you follow a clearly defined investment strategy so you can take emotions off of the table when making investment decisions.
Rule 4: Don’t Forget About Taxes
Whether or not you realize it, you have an investment partner involved in every decision you make: Uncle Sam. In addition to taxable investment accounts, make sure you're using tax-favored accounts like 401(k)s, 403(b)s, Traditional IRAs, and Roth IRAs whenever possible.
For most investors it makes sense to have a combination of "tax-deferred" accounts (e.g. 401(k), 403(b), Traditional IRA) and "tax-free" investment vehicles (e.g. Roth IRA, Roth 401(k)) in order to balance current and future tax savings. Keep in mind that Uncle Sam won't forget about you later in life!
Rule 5: Understand Risk
All investments involve risk. If you invest in stocks, you face the risk that stock prices could tumble. If you hold more stable investments like bonds and CDs, you face the risk that the return you receive won’t keep up with inflation over time.
That’s why most investors diversify into a mix of different types of investments. Make sure you understand and are comfortable with the risk you’re taking with each individual investment as well as with your portfolio as a whole.
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
Rather than wasting time worrying about things beyond your control - like the direction of the stock market, interest rates, or inflation - focus on things you can control in order to improve your odds of investment success. A simple thing to control is the cost of your investments.
You can reduce your investment costs by choosing “no load” mutual funds over funds that pay sales commissions. After all, how does paying a 5.75% upfront commission improve the odds that a fund will make you money? Another easy way to control your costs is to select mutual funds with lower than average expense ratios. (You can read more about mutual fund expenses and fees in a previous post here).
Rule 2: Know What You're Paying for Advice
Another thing you can control in the investment world is how much you're paying for financial advice. Make sure your advisor discloses all sources and amounts of income so you know exactly what you're paying. You might be surprised at how much the "free advice" you receive from your broker is costing you! (FYI - The hidden costs (i.e. sales commissions) of annuities and life insurance can be especially high.)
You can avoid hidden costs by working with a "fee-only" advisor. Unlike advisors that use the term "fee-based", "fee-only" advisors are paid directly by their clients, never receive sales commissions, and have an incentive to recommend low cost investments and insurance. (See if your advisor would be willing to sign a Fiduciary Statement like the one I use here.)
Rule 3: Ignore Your Emotions
All of us are familiar with the saying “buy low, sell high”, but following your emotions when you invest usually leads to doing the opposite. Think twice before going along with the crowd during manias like the dot-com boom and avoid panicking during market declines. Make sure you follow a clearly defined investment strategy so you can take emotions off of the table when making investment decisions.
Rule 4: Don’t Forget About Taxes
Whether or not you realize it, you have an investment partner involved in every decision you make: Uncle Sam. In addition to taxable investment accounts, make sure you're using tax-favored accounts like 401(k)s, 403(b)s, Traditional IRAs, and Roth IRAs whenever possible.
For most investors it makes sense to have a combination of "tax-deferred" accounts (e.g. 401(k), 403(b), Traditional IRA) and "tax-free" investment vehicles (e.g. Roth IRA, Roth 401(k)) in order to balance current and future tax savings. Keep in mind that Uncle Sam won't forget about you later in life!
Rule 5: Understand Risk
All investments involve risk. If you invest in stocks, you face the risk that stock prices could tumble. If you hold more stable investments like bonds and CDs, you face the risk that the return you receive won’t keep up with inflation over time.
That’s why most investors diversify into a mix of different types of investments. Make sure you understand and are comfortable with the risk you’re taking with each individual investment as well as with your portfolio as a whole.
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
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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