Baseball legend Yogi Berra was as famous for the things he said as what he did on the field. Many of his quotes don't make sense on one level, and yet they may on another. For example:
"It ain't over till it's over."
"When you come to a fork in the road, take it."
"This is like deja vu all over again."
"You can observe a lot just by watching."
Berra came to mind recently as I thought of the many conversations over the years with people who think they don't pay any fees on their investments. On one level, they don't see any cost on their statements, so it must not exist, right? On another, one man's revenue is another's expense. If you're not paying anything, then they're not making anything, and I highly doubt businesses function on goodwill alone. Ignoring the possible types of relationships momentarily (see my previous post, Form Follows Function ), it's clear that many people don't understand that they are paying fees one way or the other.
To simplify things, I like to break down costs into the following three areas when I'm comparing competing options.
Types of Costs
- Compensation to the Representative = Millions of people in the US go to work for a company, and in exchange for their efforts, they receive compensation. It is no different with your financial representative. Whether he/she works for a Registered Investment Advisor or for a Broker-Dealer, your representative is in business to receive compensation. How they go about seeking profits or providing services may be different, but the goal of every business is to generate profits.
- Costs of the investment product = These costs may go include several items, such as a markup/markdown, commission, expense ratio, mortality expense, trading costs, or fee. These costs usually goes to the company for creating and/or distributing the investment product, and may help pay for items such as compensation of their employees, marketing, or overhead.
- Recordkeeping or administrative costs = The firm you deal with tracks and communicates (physically or electronically) details of transactions and of your portfolio through trade confirmations &/or statements. Firms incur costs for tracking this information (for example, custodians, transfer agents, and broker-dealers), and often pass on these costs to clients.
I hope you find this post and others in this blog to be both educational and helpful. Let me know what your thoughts are by posting on either the LinkedIn or Facebook pages for Locker Wealth Management, by emailing me directly at alex.locker@lockerwealth.com , or contacting us through our website.
Happy Investing!