The long awaited amendment to the way investment dealers and financial advisors deal with clients is coming in July 2016, are firms worried?
The Client Relationship Model Phase 2 is meant to show clients how much money in fees they are actually paying on their investments. The actual annual cost and compensation of all operating, transaction, and related charges paid to the dealer. As well, trailer fees and other type of payments will all be shown in dollars.
Now why would an investment firm be worried. In today's investment environment, where low returns are the norm. There will be clients who discover that their dealer or financial advisor or mutual fund manager is actually making more money (in fees) then they are on their investments. Not just this year but year after year after year.
There are literally millions of mutual fund clients who do not even think they are paying fees for years now. These individuals might be in for a big shock when new quarterly statements start showing up in their mailbox showing the fees that are paid out (in dollars).
But smart investors already pay low fees, either by buying their own stocks or purchasing ETFs. These type of investors will not panic when CRM2 takes into effect. If you want to pay lower fees and be in the know, then here are a few ways to reduce those crazy investment fees that you have been paying.
Don't Trade
Investment brokers love traders. Buy low, sell high, does that sound familiar? Broker fees are really low in today's environment but companies still make millions on your trading fees. If you have seen the move "Wolf on Wall Street", that is exactly how they made their money, when you buy or sell something, they make a commission regardless of if the stock goes up or down.
When you trade to make a profit and especially if it is in a non-registered account, you trigger tax implications. You have to pay capital gains tax on your trade. More money leaving your pocket.
Only trade when it makes sense for your portfolio.
Stay away from IPOs
Investment companies make more profit on Initial Public Offerings (IPOs) than any other type of transaction. Investors are told to get excited about the new issue and not to miss out on the next greatest thing.
No one needs to buy the latest IPO but brokers need to sell them.
Don't buy mutual funds
Most mutual fund clients will be in for a huge shock in July 2016 when they get their new statements showing all their fees, including trailer fees paid to their investment advisors, previously buried so no one can humanly find it, will now be on view for all to see.
Now you may see mutual fund fees at 2% and think, that is not that bad but think of an investment of $10,000 in a mutual fund. The manager will be getting $200 regardless if it goes up or down. Now that $200 does not sound like much but think of an investment of $100,000 which could represent either a part of someone's life savings or even all of one's life savings. Now the 2% fee equals now $2,000. Bet you didn't know that now. You pay $2,000 for someone to manage your life savings. Your fund might not even gain $2,000 in a year or worse, it falls $2,000 and then you have to pay the 2% for it falling? How does that sound fair? So your advisor has a good chance to make more than you gain in a year.
It has been documented that high fees over a 25 year investment time frame can eat of up hundreds or thousands of dollars from your nest egg. That could make the difference between a good retirement and a great retirement.
Final thoughts
The new CRM2 will show investors how much they are actually paying in fee. Be aware, save, and make your golden years more golden.
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