How much are you paying?

October 15, 2015 - Posted by: admin - In category:

taxes - No Responses

One of the most common questions we get (either in person, via e-mail or via phone) is “how much do you charge for…” along with variations of the same question. This is totally understandable and proper, particularly in today’s climate of rising costs of living and related inflation in the fees charged by banks, investment companies and many other service providers.

Attorneys are bound by very strict rules with respect to legal fees and these rules relate to the amount of fees charged and disclosure of the same to prospective and actual clients. To summarize, attorneys are required to clearly communicate fees and also to clearly communicate what such fees will cover and what will not be covered by the same. All of this should be disclosed and agreed to by the client in writing. So when it comes to attorneys, the issue is most often a matter HOW MUCH is being charged and what the client is getting in exchange for such fee. Most often, there is not any confusion about the amount of fee being charged.

In the world of financial planning, including with mutual funds, life insurance products and other related items, things operate very differently and all too often, clients have little or NO IDEA what is being charged and who is collecting compensation. For example, according to the AARP, 80% of 401(k) plan participants are unaware of the amount they are paying out in fees each month. Such 401(k) fees can include administrative, investment, asset and audit charges. While most of these fees are typically built into “expense ratios”, most folks simply are not even aware of such “expense ratios” or how these things relate to them. Part of this is due to the fact that very often such expense ratios are buried in the middle of phone-book length legal disclosure documents called a “prospectus”, which is not only lengthy, but is often formatted and written in a manner that only the best and brightest securities law attorney can parse through the meaning of such pages.

Of course, 401(k) accounts are just one example on this subject and this lack of transparency and true understanding with regard to fees is a common theme in almost all areas of the financial products world. Take another example–that of insurance products, either annuity or traditional life insurance. It would be a VERY rare instance where a person who has just purchased an annuity and/or a life insurance policy had a good understanding what type of commission (amount and payment terms) their annuity/insurance salesman was making on that transaction. Why? Well, many reasons, but perhaps the biggest reason is that such commissions are not paid by the client upfront, at least not in a way that the client recognizes. Rather, such commissions are usually paid directly to the insurance agent by the insurance company, in the form of a sales commission, after the fact.

So what, you ask? Why should you care? You may not care. On the other hand, if an insurance agent is trying to talk you into some sort of annuity or life insurance policy, telling you that he is convinced it is in your best interest to purchase this product, wouldn’t you also want to understand what the agent stands to gain from your purchase? In other words, if this agent is going to pocket $50,000 or more in commission, don’t I have an interest and even a right to understand this? My answer is that YES, absolutely I would want to understand this reality. I would then understand that MY best interest is not the ONLY thing going through the mind of this salesman.

Let’s use a typical brokerage investment account as another example. Let’s say I have my money in an “actively managed” account, where my investment advisor and/or some other member of the investment management organization (or an affiliate thereof) watches the markets and moves my money around periodically in an effort to maximize return on my investments. In that scenario, I would typically get quarterly or bi-annual or annual statements, showing how much my investments made or lost during the preceding period. It is very common for such statements to show such investment increase or decrease in a very clear manner. In my experience, it is much less common for such statements to show the amount of “fees” that were “netted” out of the account during that period (or at least during the prior fiscal year).

I received that type of quarterly report for my retirement savings account just the other day. This report came from one of the national investment companies and was about 15 pages of charts, graphs, and other information. Buried in the middle of these 15 pages of numbers, percentages and asset allocation data points was an indication of the current balance of investment account, along with a comparison to last quarter and an indication of the amount of gain/loss I had experienced during the past quarter. However, I could not find any indication of the amount of fees which had been taken out of my account during the past quarter. Rather, there was simply a footnote reference (in size 6 font) to the investment prospectus.

Bottom line–chances are that you have very little idea what you have paid in the past or what you are current paying your investment advisor, your insurance agent or the like. Remember that even if such professional is paid a “commission” by a third party, one way or another, YOU are actually paying that fee–it’s just being paid in an indirect manner. Therefore, in addition to wanting to understand the full picture and what might REALLY be motivating the advisor to recommend a certain financial product, you should also understand how much of YOUR money is going to make its way into his/her pocket, whether directly or indirectly.

If you have any questions about such financial products and their related fees, don’t be shy–call your advisor and ask!! The advisor might be a little caught off guard that you would ask, but don’t let that dissuade you. You have a right to know!

Let me also add, in fairness, that just like any other profession, there are some good and some not-so-good financial advisors. Many such professionals are indeed looking out for their clients’ best interests and many even go out of their way to disclose relevant financial arrangements, including at least a general framework for how such advisor is paid. However, in my experience it is also true that a good number of such financial advisors do NOT do these things.

Again, you have a right to know what is happening with your money!