Does Your Broker Really Work For Free?
I can’t tell you, honestly, how many times I’ve heard someone say, “I’m not happy with my broker, but I don’t really pay him, so I can’t really be that upset.” And when I tell that person that while they might not see the money coming out of their account, they’re still paying the broker, the person almost invariably says,
“Oh no, I don’t. I don’t pay them anything.”
Then I show them their account statement, and we look at all the different mutual funds or variable annuities that they hold, and I explain that these companies are paying the broker or brokerage firm. Brokers usually don’t fully disclose the fact that they are getting paid by a company for selling people their mutual funds or annuities. At least not the total amount they’re being paid. So when clients find out, they’re usually shocked beyond belief!
It’s different with a Fee-Only® companies. They’re investment advisors and wealth managers. They actually ‘do’ real financial planning. And they charge their clients a fee – they disclose it right up front so their clients know exactly what it is.
People can’t really make an apples-to-apples comparison between Fee-Only® companies and those brokers who deal in mutual funds because they don’t have mutual funds that pay them. They’re paid by their clients, not the investment company! So Fee-Only® companies provide advice and make decisions that are in their client’s best interest. And they can do that because we’re not being paid by anybody else.
Let me explain how this might make a difference in your financial life. Say you have $100,000 invested with your broker and you are in mutual funds. I’ll use an example of the US mid-small-cap group of mutual funds. And I’ll compare it to something called an exchange-traded fund, an ETF, that our firm might use. It’s a fund as well, but it’s a completely different animal than a mutual fund. The major difference really is the cost.
With mutual funds, the average costs that you don’t see (it’s disclosed, but it’s not easy to find) is 1.43%, per year. So if you have $100,000 invested, you’re actually paying $1,430 per year. Now compare that with an exchange traded fund (ETF). The average cost for this type of fund is.51%, or about ½%. On the same $100,000 account your yearly fees would be $510.
That’s a savings of over 64%! ($510 vs $1,430)…but what does that mean for you?
Over 10 years assuming an average 8% return you’d have $19,100 more in your account! What would you do with an extra $19,000?
That’s the difference in the fees and costs that most mutual fund and annuity brokers don’t show you! (Note: The costs are at least double with a variable annuity!)
