Can An Average Investor Safely Make Money After Paying All The Fees?

Fees 3d Word Bear Trap Money InterestDo you have a 401(k)? How much are you paying in fees? Is your money invested safely? Is it company-sponsored, or self-directed?

A TD Ameritrade survey found that 27% of investors knew how much they were paying in 401(k) fees and astonishingly, 37% of respondents were unaware.

I believe in maximizing your 401(k) contributions, particularly when there is an employer matching provision. What’s not to like about receiving free money on top of your salary, and the government allowing you a current tax deduction for saving?

Our recent article, Do You Need a Financial Advisor? Are They Trustworthy?, reveals that many financial advisors funnel investors into products with high, ongoing fees.

It is estimated that over 95% of 401(k) participants pay fees. Those fees can easily be more than your income.

Investopedia reports, The Hidden fees in 401(k)s:

“A 401(k) is a defined-contribution plan…. You put in a set amount per paycheck, and your employer may match some percentage of that amount, and years later, you’re enjoying some degree of financial independence….

…. Your 401(k) provider is now required to disclose all its fees in the prospectus that it gives you when you enroll in the plan, and which it updates and sends you every year. We know you devour these statements the minute they arrive.

…. Generally filed under “marketing fees,” 12b-1 fees are ostensibly earmarked for the intermediaries who sell the specific 401(k) plans to your employer. These fees, capped at 1% of assets, constitute a commission….

Note that 12b-1 fees, which are charged by individual funds, are separate from investment management fees, which are the cut the 401(k) provider takes for itself. For instance, Fidelity Investments is America’s biggest provider of 401(k)s.

A typical advisory fee for a Fidelity portfolio account starts at 1.7% and decreases from there by as much as half, depending on how much you put in.”

Fees come in many ways. 401(k)s generally incur fees charged by the plan provider, and those charged by the Mutual Funds or Exchange Traded Funds (ETFs) in the account.

If you hire a financial advisor, you pay management fees, similar to the fees paid to a 401(k) provider.

While the fees are supposed to be transparent, they are worded to confuse.

Whether you have an IRA, 401(k), or are investing individually, today it’s difficult to earn a good return on your money – safely!

Subscriber Alex E. writes:

“Thank you for today’s article about financial advisors. When I received a buyout from my former employer, I gave the money to a Mutual Fund Manager. I selected several funds I thought would grow nicely into the future, not realizing that the funds charged a 2% Management Expense Ratio (MER).

I found out the hard way that I was paying dearly for the “privilege” of owning their funds…. So, after 10 years, they managed to average a little over 5%, woefully behind the stock market at the time. I would have done better with CDs.

I couldn’t figure out why I was getting such little return until I read some books explaining how the Mutual Fund Industry is actually rigged to provide a nice income for them, not so much for you…

I took back my money, did some real research and started investing it myself. I beat the market and doubled their return in 3 YEARS. It just goes to show you how much you are actually losing to these Federally sanctioned criminals….”

Miller on the Money Financial Advisor Special Report

Investopedia explains how investors confuse Management Fees with Management Expense Ratios (MER):

“Mutual funds charge management fees to cover their operating costs, such as the cost of hiring and retaining investment advisors who manage funds’ investment portfolios and any other management fees not included in the other expenses category.

A mutual fund incurs many operating fees associated with running a fund other than the costs to buy and sell securities and pay the investment team….

The management fee encompasses all direct expenses incurred in managing the investments such as hiring the portfolio manager and investment team. The cost of hiring managers is the largest component of management fees; it can be between 0.5 percent and 1 percent of the fund’s assets under management (AUM).

Notably, the cost of buying or selling any security for the fund is not included in the management fee. Rather, these are transaction costs and are expressed as the trading expense ratio in the prospectus. Together, the operating fees and management fees make up the Management Expense Ratio (MER).

Reviewing these fees in the prospectus may not always be straightforward, depending on what wording the mutual fund company uses. (Emphasis mine) …. Below are some examples from actual fund company prospectuses:

Fund Company #1
Management Fee: 0.39 percent
Total Annual Operating Expenses: 1.17 percent
The individual investor needs to calculate the MER, which in this case is 1.56 percent.

Fund Company #2
Management Fee: 1.80 percent
Fund Expenses Indirectly Borne by Investors: 2.285 percent (expressed as $22.85 for every $1,000 investment)

The language used to describe the MER may not be uniform from fund company to fund company, so careful review of the prospectus is required.” (Emphasis mine)

Investors not only pay a fund manager, they also pay all the costs of running their business and transactional costs. The fund makes their profit regardless of how they perform.

Subscriber John S. writes:

“Your current article on Financial planners was spot-on. After three years of disciplined savings, I looked for a financial adviser.

The first two turned me down because I was too small. I was fortunate to find a young man just starting out who seemed to fit the bill. His fees were 1% of invested money, but I was able to negotiate not including some investments. I handled all the invested money (Emphasis mine). We worked together for a number of years, until he joined a firm, which would have raised my fees quite a bit, so we parted ways.

I found another planner, and negotiated an arrangement where I pay one annual fee ($750) and have unlimited phone calls and/or visits. We get together two/three times a year to discuss asset allocations and re-balancing. I’m happy to say that it appears that our nest egg is sufficient to last us our lifetime with a little left over for our 2 sons and 4 grandchildren.”

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Subscriber Tony D. worked as an analyst for a major brokerage firm. His response is interesting:

“My biggest pet peeve was how to invest for people near or in retirement. The common rule was 100 minus your age. If you were 65, no more than 35% of your assets should be in the market. I felt your exposure to the stock market should be minimal.

But of course, the average advisor has their clients heavily exposed to stocks, which is what led to the disaster in 2008-09 that saw many retirement plans evaporate as precious capital disappeared. That was followed by record low interest rates and advisors putting an even larger percentage of client’s life savings at risk.”

Many financial advisors put clients’ money into higher-risk products, hoping to earn good returns to justify their fees. The formula Tony mentioned was considered gospel for many generations. If you are 65, then 65% of your investments should be in safe, fixed income products.

Below is a screenshot from my online broker. These change hourly.

Screenshot from broker - fixed income offerings

How can an investor earn money safely? 30-year FDIC insured Certificates of Deposit pay less than 2%. 20-year treasuries barely top 1%. Neither will beat inflation.

The tax-free municipals looked too good to be true. Most were in states that are candidates for filing bankruptcy. The market is pricing the possibility of default into the price. If you buy the bonds and treasuries through a mutual fund or an ETF, there will be fees involved. Subtract the fees from the low interest yield and what’s left for investors?

Is the stock market really safe? I’m sure there are some solid companies that will continue to pay nice dividends, but will their share price drop with the market? It took 25 years for the market to rebound in the Great Depression.

Some of my cancer doctors are subscribers. We recently discussed how busy high wage earners feel they must rely on a financial advisor; they simply don’t have time to manage their money. We concluded that it’s almost impossible for them to accumulate wealth without taking risks the previous generation would have avoided.

Subscribers John and Alex realized the high cost of fees was impacting their retirement. Using a financial professional like a family doctor for an annual checkup worked well for John. Alex is also spending time and money to stay educated. They place all the trades themselves, generally buy individual fixed income products and stocks, avoiding investments (funds) that charge ongoing fees.

Can you make money safely? Sure; once you accept the idea your job is money manager. Manage your money manager if you have one. Avoid investments with ongoing fees unless they have a terrific track record.

Sadly, at the end of the aforementioned articles about high fees, they promote their referral service for finding a fee-based advisor? Selecting a financial advisor who pays the best referral fee is a recipe for disaster!

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On The Lighter Side

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Want to see a true hero? Check out this cool 3-minute video.

Beautiful cactus flowers in the Miller's gardenJo and I were concerned about the early 100-degree heat affecting cactus flowers. Didn’t happen. Cactus flowers are everywhere. Jo took this shot in our garden, which is helped by her watering regularly.

I never saw cactus flowers until we moved to AZ. They are beautiful. Much like people up north take nice drives when the leaves are turning in the fall, we like to do the same here in the spring.

And Finally…

We will close with some more signs from a clever Austin, TX restaurant:

Funny Texas Restaurant Sign - happiness

Funny Texas Restaurant Sign - Stomach flat

And my favorite:

Funny Texas Restaurant Sign - Let them nap

Until next time…

Dennis Miller

“Economic independence is the foundation of the only sort of freedom worth a damn.” – H. L. Mencken


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