How Much Are You Paying for Financial Services?

How Much Are You Paying for Financial Services?

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About the Author

Ostrom retired from the Air Force in 2000 after serving in a variety of personnel, education and training, and executive officer assignments. His assignments included tours in North Dakota, Florida, Korea, Australia, and the Pentagon. His final assignment was on the Joint Staff, writing and championing legislation related to joint officer personnel management issues. He earned numerous decorations and awards over his Air Force career.

After Air Force retirement, Ostrom was a practicing investment advisor at a large investment firm and a bank. He specialized in working with clients developing, implementing, and managing investment plans and portfolios.

A native of San Antonio, he earned a Bachelor of Arts and Master of Arts and is a graduate of the Royal Australian Air Command and Staff College and the U.S. Air Command and Staff College.

Ostrom joined the MOAA staff in 2006. His responsibilities include researching and writing articles and answering member inquiries regarding military benefits, health care, survivor issues, and financial concerns. He also travels extensively to discuss these matters with servicemembers and retirees and their families.

Unlike most consumer purchases, figuring out the cost of financial advice and investing can be like an Indiana Jones expedition. Do we really know how much we pay?

Some advisers quote a fixed price for the job desired. Suppose you want a comprehensive financial plan that considers savings, investments, retirement, insurances, taxes, and estate planning issues. That might be $3,000, for example. The price varies based on the job’s complexity. Or you may be stated an hourly charge and told it will take eight hours.

Some places charge a percentage based on assets under management, e.g. 1%. It is common for the percentage to decrease as asset amounts increase. Think volume discount.

Commissions may be charged by your adviser. This is a sales charge applied to each transaction like a buy or a sell. This could be a favorable payment method if you don’t expect to have many transactions. For instance, you buy an Exchange Traded Fund through your on-line broker for $8. A full-service broker will charge more but you get extra service for the extra cost.

Some investments and products charge an up-front sales charge; called a "sales load." This up-front charge is applied by the company who offers the product not your financial adviser. Say you buy a mutual fund in your account. An up-front sales charge may be applied by the mutual fund company and not your adviser.

There are also back-end or surrender charges applied by companies offering products. If you buy a mutual fund or an annuity for example and later sell all or part of it, you are charged a fee to get out of the product.

Your investment or insurance product charges fees to own or hold the product. Mutual funds have annual management fees. Insurance products have administrative and insurance fees. In the mutual fund business these include annual management fees, 12b1 services (marketing fee) and possibly other miscellaneous fees. Insurance products include the insurance charge (called M&E or COI fees), surrender fees, option/rider charges, and management fees within the mutual funds within the insurance product.

This is an abbreviated primer. There could be other charges. Most likely, you are paying several layers of these fees. Example; you could pay 1% of assets under management, an up-front sales charge and costly mutual fund annual management/12b1 fees. Hopefully not. Insurance products in IRAs can get expensive.

All of this is spelled out in the fine print of your account contracts and prospectuses. Your fees should best match your planning objectives.

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