More and more I find the Wall Streeters are brainwashing people into believing they’re paying no fees and commissions to invest. In fact, many of them debate the point vigorously! Here’s my open letter to two of them.
· Dear Daughter: Company sponsored plans (401ks, 403bs, etc) are the most expensive way to invest there is.
o There may not be overt fees, but plan costs are shared by all participants; and they’re high because of their compliance costs.
o Most plans offer mostly/only mutual funds as investment choices – which are loaded with fees (see below)
o Some 30-50% (depending on what you think tax rates will be in retirement) of the money in your plan is not yours. It belongs to Uncle Sam in the form of deferred taxes you’re baby-sitting for him. Except in this case – you’re not getting paid to babysit – you’re paying the fee and commission costs to babysit his money.
· To My No-Load Mutual Fund Investing Friend: Even no-load mutual funds are expensive. The average “expense ratio” is more than 1% each year.
o If your mutual fund earns 5% – that 1% expense ratio eats up 20% of your earnings. Earn 1%, and fees consume 100% of your earnings.
o There are other expenses beyond the “expense ratio” – which are not reported, and can be as much – or more – than the expense ratio
o Mutual funds are tax-inefficient. You could be paying taxes for the last guy’s gains depending on when you buy the fund
o Bottom line: nearly 80% of mutual funds fail to out-perform the overall market average after fees.
The fact is – if we engage “markets” to grow our money; and we engage Wall Street-types to steer us to the right investments in the market; and/or if we ask the company to build us a place to place and grow our money – we face costs – all of which erode the growth potential of our money.
To learn more about the effect of fees and commissions, ping me back.