Have you ever experienced buyer’s remorse? You bought something and later regretted making the purchase. I think we all have made this mistake. Hopefully, most of our regrets are for purchases with only a zero or two involved and not involving thousands of dollars.
Unfortunately, the financial world is an area that leaves many folks confused and misguided when it comes to fees and costs. As with any wise consumer, financial product/advice consumers should perform their due diligence to understand the cost of the product or advice to be purchased. Some financial products on the surface may come across as costing the consumer little or nothing, but, after closer inspection, the costs or fees may be exorbitant. For example, there are commissioned advisors who sell loaded funds (funds with a purchase fee attached), but some of these advisors may not disclose to the client that the fee may be withdrawn from their investment account balance. The client may only notice after opening their investment statement and learning their balance is immediately 3-5% lower or worse!
Why is it important to know the costs and fees?
Most often hidden charges are withdrawn from the underlying investment. The largest culprits are insurance and commissioned-based investment products. Let’s look at a hypothetical example: A client purchases a couple of mutual funds with $100,000 that dear Aunt Ida passed on in her will. The front load fee is 5%. This means the after-fee investment goes from $100,000 to $95,000 right off the bat! In essence, the cost to purchase those two funds is $5000! If invested at 8% a year for 20 years, $5000 would grow to almost $25,000!
The same scenario can be played out for insurance based products such as annuities, as well as investment-based life insurance products. For this reason, I rarely recommend insurance based products that are tied to investment returns. Why, because it is difficult to understand the true cost of ownership. Sometimes it is even difficult to understand the product itself, and, if you don’t understand what you are buying, maybe you shouldn’t own it.
As a consumer, knowledge is key! If you are confused as to the cost of doing business with a financial advisor or insurance agent, simply ask. What you don’t know could hurt you! Don’t let buyer’s remorse impact your ability to reach your financial goals. Understand the true cost of ownership, and make sure hidden fees won’t leave you in regret.