Does Your Broker Really Work For Free?

I cant tell you, honestly, how many times Ive heard someone say

, Im not happy with my broker, but I dont really pay him, so I cant really be that upset. And when I tell that person that while they might not see the money coming out of their account, theyre still paying the broker, the person almost invariably says,

Oh no, I dont. I dont pay them anything.

Then I show them their account statement, and we look at all the different mutual funds or variable annuities that they hold, and I explain that these companies are paying the broker or brokerage firm. Brokers usually dont fully disclose the fact that they are getting paid by a company for selling people their mutual funds or annuities. At least not the total amount theyre being paid. So when clients find out, theyre usually shocked beyond belief!

Its different with a Fee-Only companies. Theyre investment advisors and wealth managers. They actually do real financial planning. And they charge their clients a fee they disclose it right up front so their clients know exactly what it is.

People cant really make an apples-to-apples comparison between Fee-Only companies and those brokers who deal in mutual funds because they dont have mutual funds that pay them. Theyre paid by their clients, not the investment company! So Fee-Only companies provide advice and make decisions that are in their clients best interest. And they can do that because were not being paid by anybody else.

Let me explain how this might make a difference in your financial life. Say you have $100,000 invested with your broker and you are in mutual funds. Ill use an example of the US mid-small-cap group of mutual funds. And Ill compare it to something called an exchange-traded fund, an ETF, that our firm might use. Its a fund as well, but its a completely different animal than a mutual fund. The major difference really is the cost.

With mutual funds, the average costs that you dont see (its disclosed, but its not easy to find) is 1.43%, per year. So if you have $100,000 invested, youre actually paying $1,430 per year. Now compare that with an exchange traded fund (ETF). The average cost for this type of fund is .51%, or about %. On the same $100,000 account your yearly fees would be $510.

Thats a savings of over 64%! ($510 vs $1,430)but what does that mean for you?

Over 10 years assuming an average 8% return youd have $19,100 more in your account! What would you do with an extra $19,000?

Thats the difference in the fees and costs that most mutual fund and annuity brokers dont show you! (Note: The costs are at least double with a variable annuity!)

Copyright (c) 2010 Brian Fricke

by: Brian Fricke

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