Before you put money into an investment, you need to know how the fees associated with the investment will affect your returns. Unfortunately, discovering what those fees are isn't always easy. Here are some suggestions for how to research and be prepared to talk to your financial professional about the investment fees they charge.
1. Be Prepared
When you meet with an advisor or salesperson, make a note about the six types of fees you need to get more information about:
- Up-front commissions
- Ongoing advisory fees
- Additional fees for services
- Fund manager fees (the expense ratio)
- Miscellaneous fees
- Transaction fees
2. Admit Your Reluctance
Acknowledge if you are reluctant to ask questions about money. With our societal taboo around talking about money, most of us are reluctant to appear rude or to upset someone by asking about fees.
3. Watch for Evasive Techniques
Companies that sell investment products spend a lot of time and money training salespeople on how to respond to consumer's inquiries about fees. One technique is deflecting queries. Suppose you ask, "How much will you make on the sale of this product?" The salesperson may answer, "If I could promise this will give you the financial security you need, is what I make really relevant?" Then they might immediately talk about a feature or benefit. Another technique is to use jargon to confuse or intimidate. One salesperson, asked about the ongoing fund expenses for an annuity, said that was "proprietary information." (For more from this author, see: Does Your Advisor Put Your Best Interests First?)
4. Word Your Questions Properly
Ask the question, "How much will I pay?" instead of, "How much will you make?" For each fund or sub-account in an investment, ask, "What is the expense ratio?" Ask questions that require specific answers: "If I buy this investment today and want to get out tomorrow, how much do I get back?" If the answer isn’t, "Everything, plus or minus one day of market gains or losses," the difference is probably a commission or fee.
For a mutual fund, ask, "Will I be buying institutional shares(the lowest cost shares available)?" If not, ask what share class you would buy and ask for the difference between its annual expense ratio and that of institutional shares. The difference is sometimes the commission paid to the company. For an annuity, ask the amount of the annual costs charged by the company and the sub-account managers.
Ask, "What other fees could be charged that we haven’t talked about?" These can be fixed annual fees, or fees to purchase or sell investments in the account, open or close an account, or contribute new funds to the account.
Protect Your Financial Well-Being
Be persistent. Ask the same questions five or six times until you get complete answers—in writing. Remember, fees affect your financial well-being, so it's in your best interest to find out what they are.
(For more from this author, see: What Are the Benefits of Passive Investing?)