Overpayment of fees and expenses is an area of investing that requires special attention.
Twice last year our company changed ETF provider due to cost/benefit ratio. Reducing fees does not guarantee exceptional performance, but unjustified or unnecessary fees and expenses reduce annual returns. Always strive to reduce friction. Friction is anything that creates unnecessary obstacles for your financial planning.
The investment world is a multi-tiered business model. Your needs may require some or all of the components of Wall Street. There are brokers, advisers, custodians, banks, insurance companies and others who charge commissions or fees. It doesn’t matter who you use for your needs, companies get paid for transactions. However, not all companies get paid for every transaction.
The sales force is usually made up of brokers who receive commissions. There is a rapid increase in paid advisors moving away from the commission model. Anything that has a cost should have an accompanying benefit. You don’t need a broker or advisor, but they can boost your confidence to navigate financial complexities.
Unless you keep cash at home, you will need a custodian. A bank, insurance company, mutual fund, cable company, or clearing houses like TD Ameritrade or Schwab are needed for retirement assets and usually hired to hold other assets as well. They have large buildings and manpower for a reason.
Custodians hold investments on your behalf. Stocks and bonds should not have ongoing expenses once purchased. Mutual funds and ETFs (exchange-traded funds) usually have documented annual fees. In mutual funds, there are also unknown annual costs derived from the trading and running costs of the fund.
An insurance product, such as an annuity, adds even more fees and expenses that will reduce your annual return. Arguably, they can provide a buffer during down periods in the stock market. You get to determine if the cost is worth the benefit. You can find a checklist of things to consider when buying an annuity at www.yourlifeafterwork.com.
All custodians make money from transactions in one way or another. Banks make money by accepting your deposit and charging your neighbor a higher interest rate to borrow the funds. Banks make money in multiple ways. They are an integral part of our economy, although fees and expenses may vary.
The NYSE and NASDAQ make the majority of their money by trading stocks. Each stock has a bid price – what it will be bought for – and an ask price – the price at which it will be sold. The difference between the two numbers is the Wall Street profit margin. The larger the daily volume, the happier their business model.
Your job is to figure out which pieces of the financial puzzle are necessary, beneficial, or just convenient for you. There are parts you can do without, but the benefit might be worth the cost. Many excessive fees are unnecessary. The right decision today may be the wrong one in the future. Choose and choose wisely.
Joseph “Big Joe” Clark, whose column is published on Saturdays, is a Certified Financial Planner. He can be reached at [email protected] or