Sticker shock: Your investment fees are more than you think

 Published: Thursday, 16 Jan 2014 | 7:00 AM ET

 

By: Elizabeth MacBride, Special to CNBC.com

When investors come to FutureAdvisor, an online financial advisor that offers a free fee-evaluation service, their biggest surprise is not how much they're paying in fees—it's that they're paying fees at all.
Despite decades of work by regulators pushing greater disclosure of fees on mutual funds, most investors remain blissfully unaware that they are paying hundreds, if not more than $1,000, in investment fees each year.

"People think because there's not a number, like the one above the button on Amazon.com, that they're not paying anything," said FutureAdvisor CEO Bo Lu. "Just because it's not above the button doesn't mean you're not paying it."


A typical American fund-holding household, with $120,000 in mutual fund assets, paid $873 annually in ongoing fees for its mutual funds in 2012, the latest year available, based on an analysis by Lipper.

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That doesn't include sales charges or other fees, which could amount to several hundred dollars more a year. Front- and back-end commissions and fees can each be as high as 4.75 percent and 5 percent, respectively, Lu said.

The average ongoing fees paid by the typical household have dropped since 2000, but that is mostly due to the adoption of passive index-based funds. The fees paid by investors in actively managed mutual funds dropped slightly between 2000 and 2012, falling from .99 percent basis points to .82 percent, according to Lipper. A different analysis of fees on actively managed funds published by Princeton University economist and Wealthfront chief investment officer Burt Malkiel last spring showed that fees on actively managed mutual funds rose by about one-third between 1980 and 2010, to .90 percent from .66 percent.


Don't fall into the trap of thinking the dollars are small because the percentages are, and don't count on a fund company, financial advisor or broker to be up front with you about fees, said Barbara Roper, head of investor protection for the Consumer Federation of America, pointing out that investors usually receive their prospectuses after they buy.
"If you want people to focus on fees, you would provide that information before they buy and in a form that they can easily understand. That's not done," Roper said.
So how do you cut your fees?

Stocknshares | E+ | Getty Images

 

• Become aware of the size of your fee burden. After a year like 2013, in which the S&P returned 30 percent, it's easy to get complacent. A rising market lifts all boats, but the boats that win the race have the lightest weights. You can't control the market, but you can control your fees. Assuming the typical investor had invested that $876 every year instead of paying it to the investment company, he or she would have had an additional $80,000 in her portfolio after 30 years, assuming a 6 percent average return.

• Think of your fees in dollars, not percentages. "There is all kinds of behavioral economics research that shows people tend to think a figure quoted in dollar figures is larger: $100 is more than 1 percent, even when they are the same," Roper said. Think about how much time you put into considering the costs of a purchase like a washing machine, dryer or refrigerator—those are purchases made once a decade or so. You spend that much on your investment fees every year.

• Comparison shop. Just as you might buy a washing machine from a discount store, one way to consider your fees is to consider whether you can get the same service for a cheaper price. For instance, in 2012 active and passive investors earned almost the same: 14.42 percent for investors in passive funds, on an asset-weighted basis, and 13.10 percent for investors in active funds. But the Lipper analysis showed that active investors paid $985 for their returns, and the passive investors paid only $216—less than a quarter of the price.

Don't think you're special. You may not see the fees you're being charged show up as a line item on your quarterly or annual statements, but that doesn't mean they're not there. The fees included in your expense ratio are taken right off the top of your returns before they're even reported to you. Other fees aren't included in your expense ratio; they fall under the category of commissions or under no category at all. Those fees are often deducted in the few days between the time you send the fund company your money and the time it shows up in your account. "When people see that their account is a few hundred dollars less than their deposit, they assume it's market movement," Lu said.


• Ask which fees you're being charged and when they are being applied. If you have a financial advisor, he or she should be able to tell you. In addition to the expense ratio and commissions, you should ask about transaction fees, redemption fees (for when you cash out the fund) and other fees, such as fees for research, legal transfers, custodial fees and fiduciary fees—or even a purchase fee, separate from your sales commission or load. Tip: Ask which fees are included in your annual expense ratio and which are not.

Also find out if your fund charges 12b-1 fees, which are marketing fees charged by the fund to the client and then paid out to the advisor or broker who sells the fund. The SEC imposes no limits on the size of those marketing fees.

You could, of course, read your prospectus, where you'd find the fees mentioned, too. But the dense document written in legalese is often hard to weed through. "The design of a prospectus is perfectly matched to the desire of someone to read it," said Charles Ellis, the author of "Winning the Loser's Game" and an investor advocate who is an advisor to low-fee online advisors, including Rebalance IRA and Wealthfront, both based in Palo Alto, Calif.

The bottom line: Do your homework.

—By Elizabeth MacBride, Special to CNBC.com

US no longer among top 10 for economic freedom

 

 Published: Monday, 13 Jan 2014 | 10:00 PM ET

 

By: Ansuya Harjani | Writer, CNBC Asia

The world's freest economy is...

Ed Feulner, Founder and Chairman of the Asian Studies Center, The Heritage Foundation, explains why Hong Kong took this year's top spot as the most freest economy.

The United States is no longer among the world's top 10 nations in terms of economic freedom, according to a newly published index.
The world's largest economy slipped two notches into the 12th position in the 2014 Index of Economic Freedom by think tank Heritage Foundation and the Wall Street Journal, released Tuesday, registering its seventh consecutive decline.
The index evaluates countries in four broad areas: rule of law; regulatory efficiency; limited government; and open markets.


"The overall economic policy direction of the United States in recent years has involved substantial growth in the size and scope of government, accelerating the erosion of economic freedom and contributing directly to America's fall from the top 10 freest economies," a report accompanying the index said.

Dario Cantatore | Getty Images Entertainment | Getty Images

 

"The absence of meaningful fiscal reform has weakened the government's balance sheet and led to the explosive growth of government debt. The increasing cronyism that has accompanied the growth of government has undermined the rule of law, further eroding America's economic freedom," it added.
In addition, costly regulations in areas like finance, health care and the environment have curtailed economic freedom in the country, which is at its second lowest level in the 20-year history of the Index.
"These have injected uncertainty into business decision-making that has slowed job creation and hiring and hurt economic recovery and growth," the report said.

The world's freest economy is...

While the U.S.'s economic freedom is deteriorating, the global trend is more positive, with much of the momentum lost during the past five years being regained.
The world average score of 60.3 is seven-tenths of a point above the 2013 average, and the highest average in the two-decade history of the Index.
Asian financial capital Hong Kong maintained its title as the world's freest economy for the twentieth consecutive year.


"Creation of a new company, the level of taxation, the ability of the lowest quintile to rise up, is better in Hong Kong than anywhere else," Ed Feulner, founder and chairman of the Asian Studies Center, The Heritage Foundation told CNBC Asia's Squawk Box.

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Ahead of Hong Kong's annual policy address, Anthony Nightingale, Director of Jardine Matheson Holdings, lists out issues that the government needs to tackle.

Meantime, Singapore, Australia, Switzerland, New Zealand and Canada placed in second through sixth place, respectively. The world's most-improved country is Burma thanks to improvements in its investment, business and labor freedom scores.

Finally, and not surprisingly, the hermit kingdom, North Korea has retained its position as the least free economy.

"North Korea may be attempting to open its economy slightly by encouraging limited foreign direct investment, but the dominant military establishment and ongoing leadership transition make any near-term substantial changes unlikely. Normal foreign trade is minimal, with China and South Korea being the most important trading partners," the report said.

—By CNBC's Ansuya Harjani. Follow her on Twitter:

@Ansuya_H

Retirement reality check: Time to get a grip

Published: Tuesday, 7 Jan 2014 | 7:00 AM ET

 

By: Jerry Lynch | President of JFL Total Wealth Management

Most of the time, right before you retire, you are at the highest discretionary income in your life. The kids had left the house (hopefully), you may have two incomes coming in, and you are having a lot of fun. Dinners out with friends, vacations, nice cars … life is grand! You cannot wait until you are retired and you can do this full time. So finally you pull the ripcord, fully retire, and plan on having the time of your life…until you meet with me (or someone like me) and you get the bad news. There is no way that you can continue to spend at the level that you are, and not run out of money! WHAT?? I want to get a new planner! Trust me, changing the planner will not help, you need to change the plan. 

 

After the original conversation sinks in, most people come to realize that they really need to plan for this (you think???) and get a handle on what they can spend. So, the question becomes: How can we make this happen and have fun?
Retirement and your income in retirement is all about choices and every decision has a ripple effect. It is about what you are willing to compromise on to make the master plan work.

Here are a few ideas to make this work:

Andy Ryan | FoodPix | Getty Images

 

Expenses. We need to start with what you are spending on a regular basis and break it out three ways. First, the necessities (shelter, medical expenses, electric, gas, insurance) and then, the wants and the wish list. After the expenses are divided, I give them a weighting of 1-10. Tens are must have, and ones are on the wish list. Also, we need to consider inflation.

Income. What do you have coming in, reasonably, from your investments, Social Security, pensions, etc.? Generally, withdrawal rates on investment accounts are around 4 percent or lower, depending on the ages. Add this to any pension and Social Security benefit and that is all we have to work with.


Compare the two. If expenses are below income, go back to the beach and enjoy your margarita! If expenses are above income, then we have some work to do. First let's see what the difference is as that is the number (minimum) that we need to cut. Let's get to it.
So, we have divided our expenses into needs, wants and the wish list. It still may be possible to accomplish everything but we are going to need to get creative. Let's start with the needs.

The needs list

I would assume that with rankings close to 10 included housing, auto expenses and medical. Let's just focus on this and remember, it is all about choices.

Housing. The bigger the number, the more we see if we can shrink it. Many people want to stay in the home that they lived in forever, but in most cases, that is not realistic! The home may be paid off however, depending on where you live, the property taxes can still be quite substantial. The property may be much larger they you need or it may be a two-story and guess what? At some point, you will need a one-story as you get much older. Oh yeah, you are the only retired person on the block and all of your friends have moved away. This may be a perfect time to rethink where you need to be in the next 10-20 years, incorporate it into the plan, and reduce your expenses.

Auto. Yeah, a sports car or a luxury sedan are impressive and very nice, however they are expensive. You need a car but not necessarily a car that costs you $1,000 per month plus insurance. Maybe you can bring it down a little and either get a certified pre-owned, hold the cars for longer time periods, or just get less expensive cars.

Everything on this list is necessary, however is it necessary at the level you are currently spending at? It is important to realize that even the "needs" are negotiable, and that dollars saved means that we have more flexibility in other areas.

The wants

This may include vacations, helping the kids with money, country clubs, etc. The key here is to develop a "reasonable range" so we can know what we would like to have, and what is the bare minimum that we can accept. Few examples.

Vacations. So, maybe we would like to do three vacations per year for a total of $10,000 per year. Is it possible to reduce that maybe to two per year? That would save you $3,333 per year. If three is a must, can we cut the cost? Maybe we can visit friends that we have not seen and stay with them. What are other creative ways we can cut this expense?

Country clubs. I have never met anyone who belonged to a country club that said it was financially better for them to be a member then to go to public courses! It is more a lifestyle decision. Let's think about alternatives that may work and help save money.

Kids. I have never met a financially successful person that was "on the dole" from their parents. Generally you end up subsidizing your kid's lifestyle and then never make the tough decisions that they need to succeed. Subsidizing your kids in retirement is a sure way to go broke — then everyone goes down.

The wishes

This may be called the "Bucket list." Generally, they are more expensive items that would be terrific to do, the key is seeing if it works in your plan.
So, let's assume that you prioritized, cut, retooled and still the numbers do not work, what do you do then? Simple. You do not retire or, at least, you figure out a plan B.
Plan B may include:

Push back retirement a few years until the numbers do make sense. Let's say you need $50,000 annually to live. Pushing off three years saves $150,000, which invested at 7 percent for 20 years, gives you an additional $580,000 at the back end of your plan. That's a lot more than just $50,000 a year!

Part-time work. if you only earn $20,000 annually, that may be able to pay for those vacations or extra treats that you want in retirement.

Push back Social Security. Every year you wait, your benefit increases by 8 percent, and almost doubles from age 62 to age 70. Get 65 out of your mind as it is not realistic for most of the U.S. population. It is incredibly difficult to be retired from 65 to 85, which is around average life expectancy, and not run out of money. Don't gets sucked into the "I'm a failure if I do not retire at age 65" trap.

Everyone wants to be retired, have fun, go on great vacations, and spend money on the kids. Every decision that you make in life and especially in retirement has a ripple effect. It is better to push back retirement a few years when you are you (even if you hate it), than to run out of money in your 80s. A solid retirement income and expense plan means that you can still have fun, but just with a realistic budget! Retirement income and expenses are about choices. Knowing your numbers and what you are willing to compromise on will give you the ability to enjoy your retirement and not have to worry about money.

— By Jerry Lynch

Get a tax deduction for charitable giving

By Kay Bell • Bankrate.com

Each year as Dec. 31 draws near, Americans are bombarded by requests for donations. Many answer those solicitations, happily giving to their favorite charities.
This year-end generosity also might pay off at tax time, as long as you know and follow the Internal Revenue Service's rules on tax deductions for donations.

Itemizing required

You can give thousands of dollars, but if you claim the standard deduction amount on your tax return, your charitable gifts will do you no tax good. You must itemize expenses on Schedule A to deduct charitable donations.
The good thing about donations is that, in most cases, there is no limit on how much you can deduct.

Timing is everything

Donations must be made by the end of the tax year for which you want to claim the deduction. If you put a check dated Dec. 31 in the mail by that day, you're OK. So are donations charged by year's end to your credit card, even if you don't pay the card's bill until the next year.

Check out the charity

Only contributions to IRS-qualified charities are deductible. This means the group meets Uncle Sam's requirements to be classified as a tax-exempt organization. You've probably heard this referred to as 501(c)(3) status, so-called because that is the section of the Internal Revenue Code that governs such groups.
Ask the charity to which you plan to give for information on its tax status. Reputable nonprofits will be more than happy to offer proof.
You also can check out groups via various online databases, such as GuideStar and Charity Navigator, as well as by using the IRS' own online searchable database of exempt organizations.

Know your limits

Remember that phrase "in most cases, there is no limit on how much you can deduct" mentioned earlier in connection with itemizing? That applies to most people, but for some very generous folks, there are limits on tax deductions for donations.
Most public charities are known as 50 percent organizations. They get this name because donors' deductions are limited to 50 percent of their adjusted gross income. For example, if your adjusted income is $50,000 and you give $30,000 to a qualifying nonprofit, you can't claim your full charitable gift in the tax year in which you give. You can only claim up to $25,000.

However, the other $5,000 isn't lost. You can claim the excess donation amount on your next year's tax return. You have up to five years of "rollovers" to claim the full charitable gift.
Most of us won't have to worry about this limit, but in case you come into some unexpected cash and want to share it with a charity, take into account the deduction limit.
There also are 20 percent and 30 percent donation deduction limits for specific gifts and the groups -- typically private charities -- that receive them. These rules are more complicated, so you should talk to a tax professional if you're planning a gift that falls into this category.
Also, beginning with 2013 tax returns, higher-income taxpayers might not get the full benefit of their total itemized deductions, including charitable gifts. The Schedule A total is reduced for taxpayers who make more than $150,000 if married filing separately, $250,000 if single or $300,000 if married filing jointly or as a qualifying widow or widower.

Read more: http://www.bankrate.com/finance/taxes/get-a-tax-deduction-for-charitable-giving-1.aspx#ixzz2pSXeB8td