Before you put money into an investment, you need to know the fees that will affect your returns. Unfortunately, discovering those fees isn’t easy. Here are some suggestions to help you ask the right questions and get complete answers.
1. Be prepared. When you meet with an advisor or salesperson, take a list of the six types of fees you need to uncover: up-front commissions, ongoing advisory fees, additional fees for services, fund manager fees (the expense ratio), miscellaneous fees, and transaction fees.
2. Do not assume that an advisor or salesperson will readily give you full or even partial information about fees.
3. Acknowledge your own emotional baggage around money questions. With our societal taboo around talking about money, most of us are reluctant to appear rude or to upset someone by asking about fees.
4. Watch for evasive techniques. Companies that sell investment products spend a lot of time and expense training salespeople to “handle” 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 you that this will give you the financial security you need, is what I make really relevant?” and then 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.” Other strategies can involve manipulation, partial answers, guilt, and stonewalling.
5. Prepare your own written questions in advance. For example:
Ask “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 (the lowest cost shares available) shares?” 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 move money, purchase or sell investments in the account, open or close an account, or contribute new funds to the account.
6. Be persistent. The reason so many advisors and firms get away with charging high fees is that consumers don’t usually question them persistently. Be the exception. Be willing to be “difficult.” Ask the same questions five or six times until you get complete answers—in writing.
7. Remember, you don’t need to act right now. Say you always sleep on any financial decision. If you are pressured to make an immediate decision or lose out on some wonderful deal, that’s all the more reason to walk away. If you aren’t satisfied with or don’t understand the answers you receive, you can take the information to an independent financial professional such as a CPA or a fee-only planner to evaluate. Whatever you pay them will probably be the best investment you can make.
Finally, remember that fees affect your financial well-being, and it’s your job to find out what they are. No one cares more about your best interests than you do.