Hidden Expenses Lurking In Your Portfolio

When it comes to financial and retirement planning, there are quite a few places where you might find yourself dealing with hidden fees. Isaac will give you a look behind the curtain as to where these fees might be hiding and how you can perhaps avoid them in the first place.


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John Stillman: Hello and welcome to another edition of Wright Money Tips. Isaac Wright is a chartered financial consultant and the president of Financial Dynamics and Associates. Also an all around swell guy. You can get in touch with him at (804) 777-9999. Isaac, how are you this week?

Isaac Wright: I'm hoping today's program will help continue that swellness. We are going to cover, I think, some good things regarding people and how they are sometimes being charged fees that they're not always aware of, and it's my job to bring that to the doorstep today.

John: Lots of hidden expenses in the investment world. Just because you can't see them doesn't mean they aren't there. I guess, Isaac, that's what makes them hidden.

Isaac: Yes sir.

John: So, let's talk about some of these different fees that you might encounter in your portfolio.

Isaac: Sure.

John: One of those would be mutual fund expenses, the expense ratio, you may have heard it called.

Isaac: Yeah, let's go ahead and get right down to it. For you listening today, these are expenses that you can basically assume are going on always in your portfolio, or to a great degree. Number one is mutual fund expenses. You may own a mutual fund ... Quite frankly, I'm going to prob say this more than once today, but sometimes you may work with a 401(k) representative, a financial or an investment advisor or a broker, and you may own a mutual fund, and they're telling you that maybe the fee associated with your overall investments is 1% or 1.5% or some level of that, let's call it. And sometimes when you are owning mutual funds, inside of those funds that you have, you have a additional layer of fees. Every mutual fund, some higher than others, have fees associated with the management of that fund. Without being aware of it, sometimes it can be pretty expensive.

Isaac: So you may receive a prospectus. Now, all of us that have been around a bit used to get a prospectus mailed to you and/or delivered to you at the time of purchasing a mutual fund. Now a days, you get electronic copies of prospectuses. Most people, with their schedule today, don't sit there and read the prospectus front to back. Sometimes it can be hard to uncover those expenses. We are here to help. We do this for all of the families that we serve, and we also do this for families that come in that need a second opinion. It's just understanding, all right, if this is the true measure of fees, how has the performance of the portfolio stacked up net a fee? How has the performance of the investment advisor and/or the advice given in other topics related to, not just investments, but again, your overall retirement plan or your financial plan. How does that stack up as a value proposition?

Isaac: So, mutual fund expenses probably by far and above, just one thing that you will have expenses on that you may be aware of, but maybe not to the extent of sometimes you should be aware of the total cost.

John: So watch out for those fees in the mutual funds, or expenses in the mutual funds, more accurately. How about insurance related fees or expenses, Isaac? Where might we find those in your portfolio?

Isaac: Yeah. This is not an attack, necessarily, just on what I would call the security side of the business. On the insurance side, you have many different products out there today, various forms of life insurance and annuities. Doesn't mean they're bad, but you have to be aware that some, and sometimes more than some, have very high expenses built into the plan. Others are a little bit more streamlined. You need to have somebody walk you through the weeds on this.

Isaac: Annuities, for example, can have a tremendous amount of additional fees. For example, sometimes you have somebody that will tell you that the fee for the annuity is also maybe 1% on the investments or the funds that are held inside of the annuity. However, you peel back the onion, you may have additional expenses related to what's called mortality and expense fees. You may have, if you own annuities that have riders, you may have additional fees. Again, when you hear the word fees, I know sometimes it always seems like that's a negative ... Sometimes it's not, I mean, sometimes you have to understand that the fee, you may be getting a great benefit for the fee, but the problem is having a total understanding of all of the fees associated with what the product is.

Isaac: We see many products that come through the door here that were bought at bank brokerage firms, three plus percent a year in fees. And the same few people that are owning life insurance products, there are certain ones that are a little bit more streamlined, other ones that have very high initial cost associated with establishing a policy. So, again, there's no free lunch. I'm not saying that you have a bad plan or a bad product. Just know what those are, and if you're not, we can provide you a second opinion. But both mutual funds and insurance products, just understand the pros and cons and understand the total fees.

John: Very important that you understand what you have there, and that you know what questions to ask when it comes to understanding those expenses.

John: All right, now this is not a fee, this is not an expense, but it's something you need to be aware of because it is costing you money to an extent, Isaac. And that's inflation.

Isaac: Yeah, I think people understand, obviously, inflation, when they go to the grocery store and they go to the gas pump over time. But I think many people, when I say it's a hidden expense, I think they're underestimating the impact of that inflation over a longer period of time. Where these hidden expenses are how we are kind of developing this conversation today, John, are very important things to be able to address when you are trying to project money into the future of how long your money may last, or how much money you may have at the end of your life.

Isaac: Inflation is something where you can't go into a life-changing event, AKA a retirement or, again if you have a life-changing event like a disability, something along these lines where all of a sudden your income and maybe your cash flow and your expenses are all going to change. Just know, even though you may be in a safe place, per se, now, what does that look like in 10 or 20 years? And granted, we never know exactly where inflation's going to lie, but at least we have a good historical perspective on the average rate when it comes to cost of living adjustments, inflation. A good financial planner would be bringing that to the table and forecasting that for you and providing some insight on how to be able to handle expenses, or how long money may last based upon your current estimated lifestyle.

Isaac: So again, that's, in my opinion, a hidden expense if you don't address it.

John: Another hidden expense when it comes to your retirement plan is tax increases in the future. A lot of people don't stop to think about, what exactly happens to my retirement income if tax rates go up 15 years down the road?

Isaac: That's perfectly said, John. I think, without being long-winded at all, for those of you out there today, and I think most people will agree that we're in a pretty well all-time low tax environment ... There are certain people that may not be in that exact situation, but a majority are very well close to it. I think if taxes go up, that's going to definitely affect the net amount of income. So even though your gross income may still look like the same or even higher, you're netting less money, especially when it comes to, if you're pulling money from taxable resources like IRAs and 401(k)s to help supplement your other income sources.

Isaac: Most people don't take into account that change, and that net result of where that tax may have fallen on the money that they have withdrawn for their lifestyle. We've seen that happen with people that may have somebody that makes a recommendation on investments, but that's all they're doing. Obviously, most people know about our firm and the fact that we're here to provide you some insight and some ideas about how to minimize the taxes on the distributions you do take, because it's not about how much you make, it's about how much you keep. So it's a great point.

John: Final hidden expense that we'll mention for today ... And again, we started out with things that are very clearly expenses, right? Mutual fund expenses, insurance related expenses. Then we have inflation and tax increases that act like an expense. Well, this is completely within your control, but if you're going to retire the way you want to, this could be an expense that you haven't thought about, and that's just increased leisure activities. You know, Americans spend more money on Saturday than any other day of the week. Well, have you factored in what your spending might look like, when every day of the week is now Saturday for you?

Isaac: Well, I know we've defined this as a hidden expense conversation, but in a way, when you are retiring, or let's say you're changing a lifestyle where you're no longer working as many hours a week. You may have ambitious travel plans for the early stages of your retirement. You may have extra time on your hands that will likely cause you to invest that time into something that's going to likely incur a financial result where you need money. It may be a hobby, it may be a giving money or helping out with charitable expenses, or spending time with your family. I just feel like when all of a sudden it all adds up in that first year or two after your retirement, if you're not working with somebody that doesn't have experience around how people typically are spending money during that time frame, especially the early years of your retirement.

Isaac: So if you're listening to this, and again, if you're in your 50s, early 60s, you're still working but you know retirement's right on you, or maybe more importantly, you have just retired or recently retired in the last two or three years, I would really pay attention to what I'm saying here. We're finding people all of a sudden are having to make lifestyle changes and potentially going back and having to work part time, whether they want to or not. So, just as a quick last minute thought here, I wanted to include this in the, quote, "hidden expenses," because it's what I call things you don't know that you don't know.

Isaac: And maybe not preparing yourself financially with a budget, and I know that can be a four-letter word sometimes, but I'm not talking about having to create a completely different budget, but just modifying the fact that you're going to have more time and starting to try to dictate where that time is going to lead you financially. We can help you with that, and that's really a big value add, actually, for what we do here at our firm. Sometimes if you can do that correctly, it's almost like making an extra 1 or 2% on your investments. I mean, it's literally how much you're netting at the end of the day when it comes to the totality of your income, your investments, and your expenses.

Isaac: So, all of you here today, reach out. If you're here local in Richmond, we love doing the podcast here, office is right here at the corner of 288 Powhite Parkway, very accessible. We are looking to help folks just like you. So, look forward to talking with you. If you do get a chance, reach out, give us a call, (804) 777-9999. You can also shoot us a message right on our website at FinancialAndEstatePlanning.com.

Isaac: John, you know, everything that we cover each week, I know we try to bullet point, create lists. People have a limited amount of time, we try to make these shows within 10-15 minutes. People can listen to them on the way to and from work, what have you. But I just think that sometimes, what people feel about investments and they stay solely focused on their investments, there's a lot of value to be added with some of the things that we covered today that may not directly result in an investment.

John: Absolutely. So, a very helpful discussion on many fronts. Understanding those hidden expenses or costs or fees or however you want to define it in your retirement plan. Isaac gave you the number. It couldn't be easier. (804) 777-9999. Reach out if you'd like to sit down with the team at Financial Dynamics.

John: Isaac, always a pleasure. Thanks for your wisdom. We'll talk with you again soon right here on Wright Money Tips. Have a great week.

Announcer: Information is for illustrative purposes only and does not constitute tax, investment, or legal advice. Always consult with a qualified investment, legal, or tax professional before taking any action.

Announcer: Advisory services offered through JW Cole Advisors, Inc, JWCA. Financial Dynamics and Associates, Inc, and JWCA are unaffiliated entities.