So far, 2016 has been a tough year for the stock market. During the month of January, the S&P 500 Index (the 500 largest US company stocks) was down 5.5%. What will the near-term bring? I have no idea… And neither does anybody else.
In times like these it is important to refocus on the things you can control and one of the biggest is the costs you pay to invest. As Jack Bogle, the founder of Vanguard Mutual Funds says, “You get what you don’t pay for!”
Read on to learn more about sneaky fees!
Michelle Morris, CFP®, EA
BRIO Financial Planning
I’ll be honest with you. January 2016 was not a particularly fun month for stock investors. These drops can be gut-wrenching.
But nevertheless, I maintain my passionate belief that the long-term disciplined investor will be rewarded for participating in the greatest wealth creator the planet has ever known: the global capital markets. Today regular people like you and me have unprecedented, inexpensive, and broad access to these markets. It really is a remarkable age we live in.
So what to do when the stock market swoons, as it always has and likely always will? Stay committed to your plan and focus on the things you can control. There are many variables you control, and one of the biggest is investment costs.
Recently, Chicago-area reader JR alerted me to a great NPR piece titled “When Fees Attack, Rolling Over a 401k Can Trigger Big Time Charges.” (Thanks JR!)*** This piece profiles a 49-year-old woman named Elizabeth who was leaving her job and planned to roll over her employer’s 401(k) plan to her existing advisor.** She had previously rolled a 401(k) from a former job to this advisor to manage as well.
Elizabeth did not think she had paid any additional fees with the prior rollover, but with the help of NPR she learned that the advisor had invested her in mutual funds that charge a “load.” A load is an upfront sales charge. In her case, the load was 5.75% of the monies invested! She had paid nearly $2300 in load charges in addition to the $1000 a year she was paying the advisor! She had no idea, as it can be extremely difficult to discern these charges.
This advisor is being compensated partially with commissions. A commissioned advisor is paid by recommending products — in this case mutual funds — with a sales charge. Other products might include life insurance policies or annuities. Once confronted by NPR, this (now unhappy) advisor suddenly suggested low-cost index mutual funds with no sales charge for Elizabeth. Low-cost index funds are a great choice for virtually everyone, even Warren Buffet thinks so!
In this case, the advisor obviously had a monetary incentive to recommend the funds with the sales charge.
Everyone deserves to be paid for the work they do, but, as a smart consumer, it is crucial that you understand how your advisor is compensated so you can make informed decisions. (Hint: they are not members of a religious order who have taken a vow of poverty; they are not working for free.)
Even before delving into fees, one question to ask your advisor is, “Are you held to a fiduciary standard?” An advisor held to a fiduciary standard is obligated to place his/her client’s interests first, even ahead of his/her own. The alternate standard is a “suitability standard” in which the advisor’s recommendations have to be merely “suitable” for the client.
The next question to ask is, “How are you compensated?” * To learn more about the fiduciary vs. suitability standard and various advisor compensation arrangements, see this great article by Stephen Hart from Nerd Wallet.
These are YOUR hard-earned dollars. If you don’t get transparent answers to these questions, it may be time to take your dollars elsewhere.
* In my case, I am compensated solely by client fees. My clients write me checks for my services. That’s how much I’m being paid– PERIOD. I adhere to a fiduciary standard.
** The NPR piece does not address the first question which should be: “Does it make sense to roll my money out of my employer plan after I leave that job?” In most cases, the answer is “yes” since you will likely have broader and less expensive choices with an IRA. But there are times when the answer is “no,” and you should keep your funds in the employer plan! A topic for another day!
*** I love hearing from readers! If there’s a newsletter topic you’d like me to write about, please let me know at firstname.lastname@example.org!