Aging Options

"How to Pay Less and Get More in Your Retirement Portfolio."

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Money Manager Tom Cock

“I know that you believe you understand what you think I said, but I’m not sure you realize that what you heard is not what I meant.”

-Robert McCloskey

You’ve probably never heard of Robert McCloskey, neither had I. When I first saw this quote, I guessed that the words must have either been uttered by someone in the financial services business or in government. It turned out to be the latter (he was a spokesman for the US Department of State being interviewed by Marvin Kalb of CBS News in 1984).

Other than those in government, there are few others that work harder at obfuscation and creating confusion than do many members of the financial services industry. This characteristic of an industry that is so important to so many people’s future is incredibly ironic. Next to healthcare, it is probably the business in which transparency is most critical.

While complete honesty and accountability improve an investors chance of successfully building wealth, they are traits that stand in the way of the obscene profits that the financial services industry expects. Those who operate most of the banking, brokerage, and insurance businesses know that there is only a finite amount of potential profit to be made from any investment. The more they pass along to you, the less they get to keep for themselves. It is a pretty simple equation.

The best way to prevent you from discovering just how much of your potential return is flowing into the financial industries pockets is to add layers of confusion to what would otherwise be pretty straightforward investments. This can be accomplished by any number of clever distractive techniques.

For example, you purchase a mutual fund from a person who calls him or herself a financial advisor (planner, account executive, vice president, etc.) and you will probably pay a commission. According to NAPFA (National Association of Personal Financial Advisors), over 90% of those who provide financial advice are compensated by commissions. On a mutual fund, this commission can be charged when you initially purchase the shares, on an annual basis for as long as you own the shares, when you sell the shares, or any combination of the three.

This compensation structure is spelled out within the relatively ponderous disclosure document, the fund’s prospectus. However, understanding the way fees are both collected and paid out is difficult. You may think that once you have paid a commission upfront (known as a front-end load), that no additional money is being subtracted from your account to compensate the salesperson. In many cases, you would be wrong. Some funds deduct up to .25% of assets (your money) annually to provide the “advisor” with an ongoing fee (known as a “trailer”).

Then there are the funds that many brokers and insurance agents sell to their clients as “no load” funds that charge a larger annual fee (known as a “12b1” fee) that is used to replenish a pool of capital from which the mutual fund pays the salesperson a substantial commission upon making the sale. Over and above the upfront commission, these funds also tend to provide the salespeople with a “trailing” commission for as long as you remain in the fund. There may also be a fee charged when you leave the fund.

These hefty fees are rarely disclosed verbally or in any form of correspondence with the investment “advisor,” except as part of the prospectus (which they know few people ever read, much less understand). True transparency on the part of the advisor would mean that every investor would be unquestionably aware of every fee charged on every investment, and to whom those fees were being paid. The only things that are unquestionable about investment fees is the fact that few investors know what they are or who gets them.

The insurance industry has hiding fees down to a science. They wrap investments inside funds, within insurance policies to help conceal costs. Just look at products such as variable universal life and variable annuities. There are no prospectuses required, so understanding the true extent of the fees charged is a serious challenge

Insurance companies (plus other big financial businesses) lobby Congress to keep products that are obviously investments from being regulated as such – to avoid being required to tell even part of the truth about hidden fees and expenses (a recent example is the industry’s success in keeping the SEC from regulating equity indexed annuities from being regulated as securities – even though they are sold as “investments”). They know that if you know just how much is being skimmed off the top in fees that you could reasonably suspect that there might not be much left for you.

A recent survey of “affluent” investors (those with over $500,000 in investable assets) by PNC Financial Services Group, found that 74% of investors want greater transparency from their financial institutions. Over half of those surveyed (54%) felt that their financial professionals either provided nothing of benefit or were actually detrimental to their financial future.

These numbers speak volumes about the sorry state of the investment advice industry. Investors don’t know what they are getting, what they are paying, nor what they can expect from that person who claims to be there to help them enjoy a more comfortable future. Next to health, nothing is more important than your finances. In fact, greater wealth can provide improved health making it, arguably, the most important aspect of our lives. Yet, in far too many cases, we are not being provided with investments that are in our best interests, backed by solid academic research, with reasonable expectations, and a complete understanding of the costs involved.

Investors deserve better. Just don’t expect someone else to protect your interests. You have to demand accountability. Never invest in anything you don’t understand completely. Always insist on a written description of all fees and expenses you are paying. Finally, be sure that the person with whom you are dealing is actually legally required to act in your best interests. Remember, you are the one who is supposed to grow richer from your investments, not the person selling them.

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