How to Lower Your Investment Fees

Monday, February 1, 2016 | Leave a comment

Life Notes Financial Health article by Brent J. Welch, CFP®, ChFC, CRPS®, CLU, AIF®

The Bible says, “Low I am with you always…” Although it is not addressing low fees on your investments, you and I would both like to keep our costs as low as possible. This article will give you the three top ways to help keep your fees as low as possible.

The first way to try to lower your fees is to begin using indexing in your investment strategy. The Welshire Index Strategy currently uses the Dave Ramsey strategy of putting 25% of your money into Large, Medium, Small and International stocks and purchases very low-cost index strategies. The last Morningstar Snapshot showed the indexing strategy to have a fee less than 0.2% overall. Then Welshire charges a fee of 0.35% to 0.5% totaling less than 0.7% overall. That’s 7/10th of 1% in total fees for the index strategy.

Note: Even though your fees may be 0.7% or less, there is not down side protection if the stock market slides into a bear market. Indexing is a passive way to invest meaning that your advisor makes no adjustments when financial storms are on the radar. Therefore, the low-cost of doing nothing during a down turn may end up being temporarily higher than the higher cost of tactical investing where your investment advisor does something during a market downturn.

The second way to keep your costs as low as possible is to use products with no investment management fee. These are products that pay your registered representative or insurance agent a commission so that they don’t need to charge you a separate fee on the investments. The issuing insurance company or mutual fund pulls the fee out of your account before the end of the day or time period before the end value is posted. These commission-based strategies will help you keep your billed fees lower and give you the feel that your costs are lower. Through the years, however, we noticed that whether you pay fees or commissions, quite often the cost is the same to you.

Note: Sometimes the commission you pay will be in the form of a front-end load. This front-end load is a commission that comes off of the top before your money gets invested. For example, if your front-end load is 5.75% on a $10,000 investment, the company will deduct a one-time commission of $575.00 from your investments. The balance of your investment or $9,425 will get invested into the mutual fund. Other commissions are paid for through what’s called a CDSC or Contingent Deferred Sales Charge. This CDSC could last for ten years and might be structured as follows: Year 1 = 10%, 2 = 9%, year 3=8%, year 4=7% and so on. This is a penalty for early withdrawal. During this CDSC period, you might be able to take a 10% free withdrawal without penalties to help retirees live on an income stream during retirement without a penalty. Most retirees don’t pull out the lump sum 100% to buy a yacht or airplane. They are typically withdrawing about 4% to live on for the rest of their lives. After all, there are only two types of income you receive; people at work and money at work. When you stop working, you need your money to be at work generating a paycheck for you.

The third way is to invest part of your retirement nest egg yourself. By doing this, you reduce the costs you pay overall to your advisor by an average of 1.0% annually. Popular investments into your self-directed brokerage account may include individual stocks, mutual funds and ETFs or Exchange-Traded Funds. Your advisor may be able to help you out with the initial allocation for this strategy if you have another account with them that is paying your advisor’s bills.

CAUTION: In many things in life, the cheapest route may not be the best; i.e. Parachutes or seat belts. Having a lower fee may or may not be the best option for you. If you wish more action taken with your investments during market turmoil, the cost for that tactical strategy may be higher. Overall, I urge you to meet with your Welshire Wealth Advisor to keep your fees as low as possible.

There you have it! There are three ways to reduce your fees this year. Please consult with your Welshire Wealth Advisor for more details! We are here to help. Please let us know how we can help you today.

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