how not to get screwed by your financial company

Most of us invest in some form or another. This includes retirement assets in tax-advantaged accounts like IRAs and 401(k) or 403(b) plans (or the equivalent in whatever country you’re in). If you consider yourself more “sophisticated,” then you naturally have a brokerage account (for retirement or otherwise), allowing you to buy and sell stocks, bonds, and other securities. Some 401(k) and HSA (health savings accounts) are (or can be) set up as brokerage accounts, with names like “personal choice account” or the like.

The benefits of brokerage accounts are obvious: greater control over whatever you’re buying and selling, and certainly greater choice. Rather than a menu of mutual funds in a 401(k) plan, you can buy any security that trades on the open market. For savvy investors, this can be helpful. You can buy an ETF with an expense ratio of ten basis points (0.10%) rather than a mutual fund with an expense ration of ten times that figure.

A one percent expense ration might not sound like a lot. Indeed, some mutual funds are well above 1%. But those fees add up. That means that the $10,000 you have invested in a given fund incur a penalty of $100 per year, just for the privilege of owning shares in the fund. By the time you retire and have a million dollars in the fund, you’re paying $10,000 per year. Worth it? Probably not, given that most mutual funds are “managed” by a team of people who can’t even match the performance of the market index they’re tracking. In other words, that large-cap mutual fund you own will, over a long time period, under-perform a low-fee indexed mutual fund or ETF, and the fees will be higher. Ripoff? Yes, indeed it is.

What to do? First, you should invest in your future if you haven’t started doing so and if you are able. Even saving just 5% of your income per year is better than 0%. If you think the government will bail you out later, then you’re going to be working as one of those large retail store greeters later in life, and you probably don’t want that. The money you save, and the interest, capital gains, and dividends, will compound over time. Magically, those initial early investments will add up to huge savings later on. And in retirement savings vehicles like 401(k) plans or IRAs (traditional or Roth), qualified distributions (taking the money out periodically once you hit the legal retirement age) will be in a “tax favored” way, meaning you’ll pay far less from a tax perspective on your earnings.

So that’s savings 101, a basic primer. What your idiot financial advisor won’t tell you, and can’t tell you, is that the investments (esp mutual funds) normally recommended for you charge high fees (advisors typically get a cut from the sales commissions on these purchases). These fees are basically hidden to non-savvy investors. And what you don’t know will hurt you.

To sum things up so far, I’ve stated that savings is a great idea, regardless of your age (and starting to invest at a young age is a very good idea, mathematically speaking). But I’ve also asserted that most investments people choose impose high fees on them. Basically, you’re probably getting screwed from a fees standpoint. Good for the fund managers, bad for you.

What to do? Always look at the total fees associated with any fund, and ideally, buy index funds (in most 401(k) plans, you have between one and two dozen funds to choose from). Avoid any fund with a front-end or deferred “load”; these loads are a load of bullshit–a sales commission you pay either on purchase or on redemption. And pay very close attention to the expense ratio, a fee that is charged ever year. Go for an expense ratio of 1% or less, preferably much less if possible.

Index funds or ETFs (exchange traded funds are, at present, implicitly “indexed”) track a segment of the market rather than trying to beat or time the market, a winner in the end over a long time horizon. Buying the market rather than paying someone to beat it will save you a lot of money.

If you need a financial advisor for some reason, then get one based on fee rather than commission, and don’t be afraid to turn down specific suggestions, such as for specific insurance plans or particular mutual funds. Examine the sales charges and expense ratios of any funds you intend to purchase, favoring lower fee funds. For brokerage account holders, the buy-and-hold idea is still a good one; otherwise you’ll lose a boatload of money in transaction costs. Buy and hold some ETFs that capture broad market segments, and hold for a while; day-trading is for people who want to waste their money on fees in the loser’s game of market timing).

Pretty simple. And this is free advice.

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