Many Pay High Investment Company Fees For Services They Don't Use, Survey Shows (consumerreports.org)

Penelope Wang, writing for Consumer Reports: If you are investing in stocks, bonds, or mutual funds, you have a wide range of options to help manage your portfolio -- everything from traditional brokerages to mutual fund companies to online financial firms. But as consumers search for an investment company, many pay little attention to the fees they're being charged, according to a just-released Consumer Reports survey of more than 46,000 CR members. Four out of 10 surveyed said they weren't sure what they paid in fees. And of those who knew the costs, only 60 percent rated their investment company in our survey as Excellent or Very Good on the amount charged.

"Hidden and confusing fees are proliferating across the marketplace, making it hard for consumers to know what they're getting for their money, and to comparison shop across providers," says Anna Laitin, director of financial policy at Consumers Union, the advocacy division of Consumer Reports. "It is concerning that so many investors don't know how much they are paying in fees and that many of those who do understand the fees don't appear to think they are getting their money's worth," she says.

Comments

Re:News for Wall Street, stuff that steals money?

[Crashmarik]

Am I on the wrong website? Since when is this news for people who exchanged all their humanity for money?

Oh come on man. Look at the tech industry these days, not only has just about everyone given up on their humanity, they have also sold out their intellectual integrity and any morals they may have had for money, and the chance at a reasonably priced rental.

Re:News for Wall Street, stuff that steals money?

[mentil]

Not like the financial industry is a paragon of morality or intellectual integrity. Usury has had a bad name for millennia, and the proliferation of questionable economic theory (that just happens to benefit the rich), and bank bailouts, should drive the final nails in that coffin.

I'm surprised the investment companies aren't more of a confusopoly, considering related financial services (banks, credit cards) are. Might be down to better competition.

ISPs

[darkain]

WOAH, sounds just like Comcast and CenturyLink!

Fees Don't Matter When You Don't Trade

[Anonymous Coward]

Unless you're a very high net worth individual, you probably don't have access to the sorts of funds that charge a percentage of assets under management and even if you did you'd be better off without the professional traders. Instead you probably pay commission on trades and the financial industry is setup to get you into a trading mindset. They're always trying to get you into this or rotate out of that so that they can make extra trade commissions off of you. Warren Buffet was right when he observed that you should treat trades like an extremely scarce commodity. The example he used was of a punch card with 25 punches on it representing all of the trades that you will make in your lifetime. If you don't want to own a security for 10 years then you sure as hell don't want to own it for 10 hours or 10 minutes. If you think that's crazy then consider this. Warren Buffet defeated all challengers in his ten year charity benefit investment competition starting in 2008. How did he do it? He bought the S&P 500 Index fund and sat on it. Buffet won handily with an average 7.1% return, including the time period of the Great Recession, against a runner up of 2.2% average return for the next best actively managed portfolio. Think about that the next time an investment broker pitches you a financial product or a trade. The old adage still applies. If it sounds to good to be true it probably is.

Re:Fees Don't Matter When You Don't Trade

[ytene]

This might be an accurate statement in the US, but it's certainly not true worldwide. I am a (very small scale) UK investor, primarily investing a monthly contribution to an ISA account (UK-specific, limited tax-free savings). I chose to invest, via a "fund supermarket" into a primarily equities portfolio (composition varies).

This operates in exactly the way you describe, but the OP and your comments both stand. For example, if you are a "buy-and-hold" investor, then paying for the benefits of a fund supermarket, when you are not actively trading your portfolio, could soon become expensive. The platform I use bills out at half of one percent of balance per year.

At first blush that might not sound like much, but say you've got $100,000 (or £100,000) invested and say you're just cranking the handle each month, adding at the rate of say 500-1000 monthly. You're going to pay *at least* 500 yearly in fees: for what? You're making 12 transactions - all purchases. Say each of those transactions is for 1000... Now let's do the math.

500 / 12 = 41.67...

So, each month you're buying say (£/$)1000 in additional stocks, for which you're paying (£/$)41.67 in transaction fees. In other words, the fees you're paying amount to 4.17% of the transaction value.

And the real kicker is that the more successful *you* are - i.e. the better your fund accumulates in value, the *more* that is taken from you in fees - taken by a company that has done absolutely nothing to help enhance the value of your investment. A fund supermarket is a terrific means to simplify your investing, but it's a huge drain on your wealth through cunningly-disguised fees.

Unfortunately for most of us, your observations are largely entirely correct - unless or until your personal wealth rises to the point where you would be considered a "High Net Worth" individual (which today is going to mean a net worth of at least 10 million), then your legal options as an investor are to chose between a variety of schemes that are carefully designed to rip you off. Above that threshold, then the biggest opportunities that come your way are likely to be in the form of tax breaks - because you can afford to swing very large sums of money in to investment vehicles that are simply not available to the man-on-the-street.

Re:Fees Don't Matter When You Don't Trade

[ytene]

I may have got this completely wrong, but didn't a certain very large and well known Wall Street bank get found out from doing exactly this?

If I recall, the ruse went something like this:-

1. A client of the bank used the trading platform provided by the bank to put in a purchase for a large enough quantity of stock that it would likely have the effect of adjusting the price of that stock. 2. The bank made a determination that this would be a "market moving" trade, and so, using an "ultra fast" computer link, ordered that precise amount of the stock for the bank's own portfolio. 3. In response to the bank's purchase, the price of the stock went up. 4. Then the bank processed the purchase order from their client, except that what actually happened at this point was that the bank sold the client the shares from the bank's own portfolio, because of course the bank had just "beaten the client to the punch". 5. The bank booked the difference in prices as an operating profit.



Having said that, it's worth bearing in mind that this sort of practice is only really effective in high frequency trading scenarios. If the client is adopting a buy-and-hold strategy [something along the lines of a Warren Buffet approach] then, excepting the odd period of extreme volatility [witness last week's sell-off], perhaps coming just in time to bolster Q3 earnings?, those sorts of short-term variations won't have so much impact on the long-term growth of a stock or the market in general.

Re:Fees Don't Matter When You Don't Trade

[mentil]

FYI this is called Front Running and is illegal. Market specialists were accused of doing this back in the 70s IIRC. High-speed trading scenarios aren't required if the brokerage only makes loose guarantees of how long it'll be before your trade executes.

Re:Fees Don't Matter When You Don't Trade

[nealric]

That's not really true. A lot of small-time investors are invested in funds that charge significant fees based on the amount invested. Almost all mutual funds have some sort of percentage fee, though it is quite small for the better index funds. On top of that, many retail investors are paying a "financial adviser" (really a salesperson) a percentage of assets under management (often 1-1.5%). Total fees can easily be greater than 2% a year. That doesn't sound like much, but if you are a retired person, that amount represents HALF your annual income (not including social security).

The sad thing is that all these fees are rarely necessary. Simply investing in low-fee index funds from the likes of Vanguard or Fidelity gets your fees down to a nominal level (like .05%). Indeed, trading makes no sense for the retail investor, but fees on trades are rarely the biggest fees retail investors pay.

You do make a point about hedge funds, which are designed to fleece the rich. They are often worse than retail mutual funds, traditionally charging a "2 and 20" (i.e. 2% of assets invested PLUS 20% of the return). Then, pile on private equity investments that add restrictions to liquidity on top of all that. But, of course, they have a slick "wealth manager" that plays golf with them and makes them think they are getting "exclusive" opportunities because they are oh so special for being rich.

Re:Fees Don't Matter When You Don't Trade

[_merlin]

It depends a lot on the broker and market - different countries have different rules. US rules are pretty lax and let the broker get away with skimming money because they're only required to provide a client with the current best round lot price even if the order can be satisfied with an odd lot in the market at a better price. Also, some brokers actually do give you access to the stock market and allow you to use various execution strategies on their platform.

It's a bit different with derivative markets where the broker may be creating their own instruments (options, futures, CFDs, etc.) - in this case the broker creates the product and sets the price. You can't trade against other participants, only the broker. You're pretty much guaranteed to be paying unfair premiums in broker market derivatives.

The main function a retail broker provides is managing risk for small clients. The exchange isn't going to deal with investors directly because of settlement risk, i.e. the risk that someone can't deliver cash to cover their buys and/or stock to cover their sells by settlement time. Brokers and other exchange participants (e.g. market makers) are required to show that they have adequate working capital and risk control procedures to manage the risk to the exchange's satisfaction. If there's any failure to settle, it's the broker who's on the line. The broker then applies their own risk management methodology when vetting investors and setting limits on their trading.

Yes, brokers are a point of friction, and they do add to transaction costs. Ideally, competition should drive prices down. As risk management systems are improved/automated, the price brokers need to charge can be reduced. If entrenched brokers are charging too much, upstart brokers can undercut them. Of course you also need a regulatory environment that facilitates a fair market for broker services.

Oh and Goldman Sachs are cunts - we all know that.

Re:Fees Don't Matter When You Don't Trade

[mysidia]

you probably don't have access to the sorts of funds that charge a percentage of assets under management

Uhm, wrong... Most mutual funds, index funds, REITs, etc, and even simple commodity ETFs' management compensation works this way.

Annual percentage of assets under management is by far a most common way that fund managers receive most compensation for most funds; the only real way of avoiding such charges is to manage it yourself or find a personal broker willing to make a deal with you to do it for only commission (which likely makes the commission expensive and incentivizes your broker to make more frequent trades/rebalances at your expense) --- then you still pay various commissions on stock or asset transfers.

The company managing a fund generally charges an annual percentage of the Net Asset Value, called the "expense ratio" of the fund, typically a very small percentage on simple index funds, for example: 0.04% for SPYV;
leveraged funds, or actively managed funds generally have higher costs involved, and sometimes the annual and other fees are
different for different classes of shares on the same fund, depending on whether they are Institutional or Investor shares, and
within there may be class A, B, and C options.

The additional ways funds are compensated for their management include:
* Performance Fees -- charges scaled based on the percentage increase in the NAV that occurred - The manager's "performance" in growing the valuation of the fund

* Commissions or load costs when a customer deposits into a fund or purchases shares

* Sell commission when a customer sells shares or withdraws their money

a 0.5% reduction is fees is a 40% INCREASE in 401K

[Anonymous Coward]

Just remember that people...a 0.5% reduction in fees is often a 40% INCREASE in your pension when you retire. The numbers are so small i.e 0.5% that most people don't seem to do the math or care. But here's how it works

Your average return is probably around 4-6% each year if you are 60/40% bonds/equities or similar (this can be higher or lower obviously) for general employee 401Ks that most people don't look

So your REAL return is minus inflation lets say that's around 2.5% - so you are actually only getting 1.5%-3.5% ..

Your 401K provider then takes 0,5-1.5% of this!! That's basically saying they take no risk and can take 40-100% of your return for providing an IT platform, some customer service and linking to exchanges and brokers...

Frankly its ridiculous - its like Microsoft charging you a % fee for how much you make from its products...investment products should obviously be charged at a flat fee i.e 40USD/ mth like any other service...but then, that's why they can afford to lobby politicians and drive a porsche whilst the people who retire on their 401Ks live out a meager lifestyle and wonder where their money went!? All because they can't be bothered to look at their 401K or plan for the future...its a great system for the motivated to rob the unmotivated.

Take heed...investigate what your paying and move to index trackers or trusted funds that charge more BUT RETURN MORE TOO!

Just use Vanguard...

[steveb3210]

Seriously, just use Vanguard.

less than 10 basis points for alot of the mainstream indexes and no commissions...

Re:Just use Vanguard...

[110010001000]

Bingo. Plus it is run by computer to rebalance the funds so the load fees will always be low.

Investment companies are a racket

[bradley13]

For normal people, investment companies are a racket. They exist to take your money...and keep it.

If you go to an investment brokerage that actively manages your money, they not only have their own fees, they also love to buy into high-fee mutual funds that give them a kick-back. My mother had her money with a name-brand brokerage, with a broker she considered a friend - and they still kept buying and selling these high-fee mutual funds. The buying is bad enough, but cashing out and buying into another fund a year later is... Well, it's very clever. For the broker. Who is fulfilling their primary goal of keeping their clients' money for themselves.

Normal people wanting to invest really have only two choices:

- Take charge of your own investments. Learn what you're doing, and buy stuff for the long-term. If you buy a stock, buy it with the intent to keep it for several years.

- If that's not your thing, they buy low-fee index funds. In addition to the market index funds, there are also more specific ones out there. The point is, they are funds with little management, and hence very low fees. Buy into index funds, and sit on them for the long term.

Re:Investment companies are a racket

[Anonymous Coward]

The described behavior is called "churning" and it is a form of fraud. It may sometimes be financially responsible to ditch one fund and buy a similar fund in the same year, though. This is a mechanism to "capture gains or losses" by effectively cashing out of a long-held fund. The intent here is that you already have gains/losses that offset this amount. In this way, tax exposure is limited.

As to the advice of fund with low fees... I point to the Warren Buffett million dollar bet (http://fortune.com/2017/12/30/warren-buffett-million-dollar-bet/). He won and was basically able to outperform most managed funds because the fees did not eat into his profits. The managed funds rarely outperformed his index and when it did, the fees usually removed that gain.

Re:Investment companies are a racket

[jittles]

We're meeting with a financial adviser this week to discuss our finances. Both our companies and the firm they use for managing our RRSPs offer financial advisers, but we want someone independent with no skin in the game. We made it very clear when booking our appointment that we're not interested in moving our RRSP so I'm hoping to get some good advise. The index fund option is very interesting, the wife and I both agreed we should go down that route and reading the Warren Buffet article lends more credence to that strategy. Will be interesting to hear what this adviser says.

Best of luck to you. My experience with financial advisors is that, even when you're paying for their time, they try and convince you to do the most boneheaded things in order to maximize their income. I honestly believe that they are more despicable than the stereotypical used car salesman. I once had one try to convince me to refinance my mortgage to a HIGHER interest rate and could provide no real justification for it. However, the paperwork he showed me made it clear that he got a commission on that loan. I am sure there are honest advisors out there. And the type of advisor matters. I think the only type of advisor that is legally obligated to act in your benefit instead of their own is a fiduciary, but I may be mistaken.

Re:Investment companies are a racket

[nealric]

Do yourself a favor. Ignore the financial adviser and just open an account with Vanguard or Fidelity. Put 70% of your money in a total stock market index, and 30% in a total bond market index. Rebalance annually (i.e. reallocate so you don't drift too far from 70/30). That's literally all you need to do. The financial industry wants you to think it's complicated so they can skim fees for "managing" or "advising."

Re:Investment companies are a racket

[jonesy16]

As someone who just recently switched careers to be a financial advisor, I find your experience to be disheartening. I spent twenty years as an engineer but didn't feel fulfilled because I couldn't see a direct impact of my labor improving the lives of the people around me, so I wanted a way to more directly benefit those around me. I agree with the general sentiment in this thread that it's hard for the average investor to quantify the financial benefit of working with an advisor on an account with fee-based billing.

Vanguard (and others) have done research on this (https://advisors.vanguard.com/VGApp/iip/site/advisorsec/researchcommentary/article/IWE_ResPuttingAValueOnValue) and have quantified the value of an advisor at somewhere between 1.5 and 3.0% on average (and this is Vanguard saying this). Many people are somewhat short-sighted by the decade long bull market in US equities where it's been hard for any active strategy to outperform, but a lot of value from working with a professional comes from behavioral coaching during long bear markets, as well as tax strategies closer to retirement.

I sympathize with not wanting to pay someone else for something I feel capable of doing on my own. I hate paying an electrician when I can do basic electrical work, despise hiring a painter or dry-wall installer to little repairs here and there, and don't even get me started on paying for insurance. The true value you get from any professional isn't the daily value they add to your life, it's the way they swoop in to save you during an emergency. The story I like to tell is about (of all things) my insurance agent (and I'm not here to ding or promote anyone specifically so I'll leave names out), but you could show me all the commercials in the world about how I could save 15% by switching to some online insurance company with no local office, and nothing you could say would motivate me to switch. I have a personal relationship with my agent, and I can say with 100% certainty that if I were on my lawn watching my house burn down at 2 AM, my agent would be there as fast as he could to put his arm around my family and me to say "I know this looks bad, but I'm going to take care of it, let's get you to a hotel and don't worry about a thing." That's where professionals are worth every dime, but you have to work with someone who genuinely cares about you and not their take home pay.

So if you want to go it alone, you certainly can (I send many people that direction if it's best for them), but if you find a good professional and give them a chance, there are many ways they can add value to what you're doing. Financial Advisors (and CFP's in particular) are there to help with all aspects of your financial life, including tax planning, estate planning, risk management, education funding, charitable giving, etc.

Re:News for nerds?

[Roger Wilcox]

"...stuff that matters." It isn't a hit piece or a promo. The issue potentially affects all of us. I'd say in most universes this post has a fine home here on Slashdot.

Re:News for Wall Street, stuff that steals money?

[Crashmarik]

A bit of misplaced blame there. Everyone wants to get by, but we have ~30% taxes on income, ~35% taxes on corporate profits, ~5% taxes (average) on sales, 2.5% average inflation compounded annually since the 1980's, etc - all in all getting your money to the maker of a product you're looking at paying out about 80% of that just in taxes before it reaches the poor bastard assembling the thing (and that's a best case scenario when you're buying direct from a manufacturer, it only gets worse from there.) Historically societies have collapsed right around the 50% taxation mark, we're long overdue for that and everyone (very likely every software developer, engineer, and other nerd on this site included) is in the exact same boat of thinking about how to get the most out of their clients without alienating them in the process.

TL;DR: The issue is taxes, not people being greedy on the civilian side.

You're right taxes end of things. But think about how the people who actually benefit from them have turned the electorate against itself. Taxing people to build a 100 billion dollar high speed rail line that is nothing but graft ? Distract the electorate with a satellite to police other states (U.S. and foreign) carbon emissions ?? Or start up another war promoting really strange people over those that are qualified and force everyone to address them by whatever they feel like ?

If anyone goes against it, sick the mob on them. Heck if they start to forget their place, destroy someone for making a joke or wearing the wrong shirt, to remind them.

Re:The thing is

[lgw]

I don't think it's widely known just how much a "full service broker" is a racket. Paying someone else to manage your money is generally a terrible idea. It makes sense when you're setting up a trust fund for your idiot grandkid, maybe, if you can afford to just add that much more to the trust. But in general, the only way you'll come out ahead paying a broker 2% of your account annually is if he's doing illegal insider trading on your behalf (and unless you're in the 0.01%, he's not).

Re:News for Wall Street, stuff that steals money?

[anegg]

Since when is this news for people who exchanged all their humanity for money?

If the saying "early is on time, on time is late" had a corollary in personal economics, it would go something like this: "Investing is keeping up, saving is falling behind."

Investing is a normal activity for people to engage in, especially since interest rates on ordinary savings accounts haven't been keeping up with inflation for quite a while. I don't think you have to have exchanged all of your humanity for money to have some concern for how a confusing fee landscape might impact an ordinary mortal's putting money away for a rainy day/retirement. Nerds who have managed to get a little ahead might be very interested in understanding how to avoid being fleeced while investing.

Money mag is enough

[140Mandak262Jamuna]

Twenty dollars a year. Read and learn the basics. Stop after about 10 years, they keep repeating the same thing. Paying more does not get you any better advice.

Dont watch any financial news channels, There is not enough info to fill 24x7. They fill it with fluff, speculation and misinformation. Makes you trigger happy, second guess yourself and trade. You lose time and money.

Most retirement planning advice is bullshit. They assume you will spend in retirement as much as you are spending when you were earning and have no flexibility in spending. Estimate you expenses into a four categories: Essential (food, shelter, clothing, medicine) Discretionary (travel, entertainment, charity), Indulgence, Principle Protection (money to be reinvested on good years). First goal, save enough for essential without touching the principle, then discretionary. Then for Principle protection. Then for indulgence. Spend less on lean years. Spend more on good years. Reinvest in good years to hedge against inflation.