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

Posted by msmash on from the for-what-it-is-worth dept.

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.

11 of 95 comments (clear)

  1. Re:News for Wall Street, stuff that steals money? by Crashmarik · · Score: 4, Interesting

    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.

  2. Fees Don't Matter When You Don't Trade by Anonymous Coward · · Score: 5, Insightful

    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.

    1. Re:Fees Don't Matter When You Don't Trade by ytene · · Score: 3, Informative

      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.

    2. Re:Fees Don't Matter When You Don't Trade by mentil · · Score: 4, Informative

      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.

      --
      Corruption is convincing someone that the selfless ideal is the same as their selfish ideal.
    3. Re:Fees Don't Matter When You Don't Trade by nealric · · Score: 3, Informative

      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.

    4. Re:Fees Don't Matter When You Don't Trade by _merlin · · Score: 3, Informative

      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.

  3. a 0.5% reduction is fees is a 40% INCREASE in 401K by Anonymous Coward · · Score: 5, Insightful

    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!

  4. Just use Vanguard... by steveb3210 · · Score: 3, Interesting

    Seriously, just use Vanguard.

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

  5. Investment companies are a racket by bradley13 · · Score: 5, Insightful

    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.

    --
    Enjoy life! This is not a dress rehearsal.
    1. Re:Investment companies are a racket by nealric · · Score: 4, Insightful

      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."

  6. Re:News for Wall Street, stuff that steals money? by anegg · · Score: 3, Interesting

    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.