Fees. Not only can they be unpleasant, sometimes they’re sneaky. The financial industry is awash with fees that come in all shapes and sizes.
Many of them are well-known while a few are so covert that consumers get caught off guard when they realize they’ve been paying thousands of dollars in fees without knowing it. Not all fees are bad, however. After all, financial professionals have to make a living.
But that doesn’t mean they have a right to keep you blissfully unaware of what you’re paying for the services they’re providing. Before you hire a financial adviser, it’s a good idea to learn how they get paid. Ask them directly how they make their dough. If they dance around the question, take your business elsewhere.
There are a few financial fees you should never pay. Many times, these are the sneaky ones that pop up when you least expect them. Avoid these, and you’ll be well on your way to brighter financial future.
1. Mutual Fund Loads. Some mutual funds have loads. For example, class A shares are types of mutual funds that charge an upfront commission. You might pay, say, 3.75 percent of your investment money up front to buy the fund. This is all fine and dandy until you realize that many of these mutual funds also charge an ongoing management fee (called an expense ratio). Add these fees together, and you’re paying quite a hefty amount of money to own some mutual funds.
Miranda Marquit, writing for ExcessReturn.net, explains:
Sometimes, when you buy or sell a mutual fund, you pay a load fee. This can be a real drag on your returns. Paying load fees doesn’t make much sense, either, since you can find plenty of funds and brokers that don’t charge these fees.
Load mutual funds aren’t necessarily a horrible option, but there are certainly better options out there. Ask several financial advisers what they would recommend and compare the differences.
2. 12b-1 Fees. A 12b-1 fee is a marketing or distribution fee that is applied every year. This fee is considered an operational expense, so it is included in the fund’s expense ratio. Take a look at your mutual fund statements and see if you’re being charged 12b-1 fees.
don’t know about you, but I would never want to pay marketing fees. If a mutual fund has to be marketed, it may testify to the possibility that it’s not a good fund in the first place — otherwise the mutual fund would sell itself.
3. Variable Annuity Fees. One day a prospective client walked into my office and told me she had been working with a big brokerage firm that she felt wasn’t being completely honest with her. The adviser had sold her a variable annuity and some mutual funds. She wasn’t really concerned about the mutual funds, but she let me know she wasn’t exactly sure how the variable annuity worked.
Never, never buy a financial product without understanding how it works! Back to the story …
I asked her how much she was paying for her variable annuity and she thought she saw a fee for around $50. That’s not bad, right? Well, later we learned that she paid over $3,500 in variable annuity fees and didn’t even know it. Your jaw should drop right about now. I’m not a fan of variable annuities. The fees are just too high — and many times sneaky, too.
4. Late Fees. Late fees are another type of fee you should never pay. These fees may occur when you’re late paying your bills. The formula you can use to pay your bills on time is pretty straightforward. First, you must have enough cash to pay. It’s a good idea to save up extra cash in your checking account to ensure you have enough for all bills — including the unexpected ones.
Second, you’re going to need to process your mailbox, email, and other inboxes where you receive bills on a regular basis. Keep track of your automated bills and payment methods. Make sure to have a good system in place for remembering to pay your bills on time!
5. Overdraft Fees. Nobody should ever have to pay overdraft fees. The only time you’re going to overdraft on your checking account is if you intentionally do so (don’t do that) or if you aren’t keeping track of your transactions. This is yet another reason to keep a buffer of cash in your checking account.
If you forget about a transaction it will be pulled from your buffer of cash instead of putting your account into the negative which may result in an overdraft fee. If you to spend that extra buffer, then work with your bank or get an online checking account that will automatically draft from a savings account. This way you keep the money out of your regular checking but still have that buffer to cover any mistakes.
6. Foreign Transaction Fees. Credit card companies (and even banks) sometimes charge their customers fees when they use their cards overseas. These foreign transaction fees can be easily avoided by signing up for a card without foreign transaction fees or by using an alternative payment method such as cash.
These foreign transaction fees can be easily avoided by signing up for a credit card without foreign transaction fees or by using an alternative payment method such as cash.
“Would you rather spend an extra 2 to 4 percent of your purchases on credit card fees, or on a nice meal at your destination?” asks Gerri Detweiler, director of credit education at Credit.com.
7. Low Balance Fees. Some banks, credit unions, and wealth management firms charge a fee when balances on certain types of accounts fall under various thresholds. Many times, financial institutions will reward customers in the form of a higher interest rate or other perks for participating in these types of accounts. Brian O’Connell, writing for TheStreet.com, explains the joy of avoiding these types of fees:
Saving a few bucks on bank fees is a cathartic experience — it’s a rare chance to pull one over on your bank instead of vice-versa.
You should never pay a low balance fee. If you can’t keep enough money in an account to meet the minimum balance requirement, skip the perked account and opt for a simpler, boring, and fee-less account.
8. ATM Fees. ATM fees are brutal. Many times, customers will use an ATM to get a small amount of cash out of their bank accounts and be charged an exorbitant percentage of the funds they withdrew for the pleasure. For example, say you take out $20. You’re charged a $1.50 fee. That’s effectively a 7.5 percent charge. Forget about it!
Instead, make sure to ask your bank or credit union which ATMs in your area are “surcharge-free” and within their ATM network. Nowadays, you’re sure to find several surcharge-free ATMs where you need them most.
9. Payment Fees. This is perhaps one of the most annoying fees I’ve ever encountered. Imagine being charged a fee for making a payment. Um, no thank you. Some merchants have been known to charge these “convenience” — what I call “payment” — fees when you make a payment over the phone or through a store representative instead of through their automated systems such as store kiosks. Avoid paying to make payments. It just doesn’t make sense.
10. Inactivity Fees. If you don’t need or use an account, why have it? Some banks and credit unions (especially online banks) charge inactivity fees when the account sits idle. These fees can usually be avoided by any kind of account activity like making a purchase or initiating a transfer.
Brokerage firms are starting to do this, too. I’ve noticed this with new clients bringing in their statements and finding “inactivity fees” or “small account” fees on accounts that don’t generate any fees or commissions over a period of time (usually one year).
The Bottom Line
You can avoid these fees (and others) by doing a little homework before you sign up for a product or service. Read the fine print. Ask financial advisers about their fees. Talk with your bank’s or credit union’s branch manager to uncover every fee they might charge. Say goodbye to these nasty fees and hello to better financial accounts!