As our sons started to dip their toes in online consumerism via eBay and Amazon, I realized it was time for an education. Armed with gift cards and trigger-happy index fingers, it was too easy to buy. They lacked the healthy skepticism smart consumers have. They would inadvertently buy an accessory to something, when they thought the main item was included, for example; or they were lured into knock-offs that they believed were real.
Investing can be tricky like that, especially if you are not working with a fee-only advisor (fiduciary) who must put your needs first. Often times, investors believe that the sales guy isn’t making commissions off the sale (they are) and that the investments are without a mark-up, just because fees or sales charges weren’t clearly discussed. Investors assume that things are the way they want them to be (no charges) when that could not be further from the truth.
My father, rest his soul, taught me this lesson when I came home from the mall with a pair of shoes I bought for a steal. I was thrilled until he started pressing me on what material they were made of. They looked like leather to me, and I thought that was good enough. But when he asked me where on the shoes or the shoe box did it say the actual word “leather” I had no answer.
I will never forget his response – because it pertains to so much more than just shoes.
“Leather is a premium item and if the shoes were made of leather the company would make sure you knew that. That is the selling point. You shouldn’t have to hunt for that on the label. They are hoping to fool you into thinking the shoes are leather.”
Embarrassed, now, by my cheapo faux leather shoes and the more galling thought that he was, once again, right; all I could do was hope they wouldn’t make my feet sweat too badly. They were on clearance and there was a no-return policy.
When investors tell me they do not think they pay anything for their investments – not only is it never true, but it ends up that they are paying a lot more than they needed to; especially for teachers in 403(b) plans – it can be as much as 400% more.
When I encourage them to look into what they are actually paying it is hard for them to figure this out.
I tell them, like leather, low fees are a selling point. If you have to dig to find out what the fees are, the answer won’t be pretty. Again, they are hoping to fool you into thinking there are no fees.
Here are just some of the lovely discoveries I have watched investors uncover:
• Sales charges of 5.25% every time a dollar was contributed through their payroll deduction.
• On-going fund fees of 1% or higher, in addition to a wrap fee, bringing total fees to over 3%.
• Annuities with surrender charges that seemingly never end — fees can last five years and, with every new dollar invested, a new five-year rolling period of fees begins. Or, surrender charges that last 15 years!
• Paying 4.75% for a college savings plan (529) when a superior option, charging just 0.17% is also available in their state.
I really do wish I was making this up.
My sons have wised up and have learned to read the fine print and to research the seller’s ratings, so they don’t do business with sketchy characters. One son has gotten very good at making complaints that have resulted in refunds, discounts and free stuff.
I wish it was as easy for investors to get swift justice.
For now, the best recourse is to be educated. FINRA’s Fund Analyzer is a great way to look at mutual fund fees. Teachers can go to sites like 403bwise and 403bcompare – but first, they need to learn that they have to take the lead on this.
My husband and business partner, Tony, recently recorded a podcast with Next Gen Personal Finance advocating for better 403(b) plans. If you are a teacher or know a teacher, pass it along.
You could be saving someone from something way worse than a vinyl-shoed fashion faux pas.