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Expenses aren't fees
Old 06-02-2016, 10:43 PM   #1
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Expenses aren't fees

So I was in my local bank branch earlier today to put an item in my safe deposit box. While I was waiting for the box lady, the branch's 'financial advisor' wandered over to me (he must've just finished counting his 2%). He asked if we could talk and I said "sure". Thought I'd have some fun.
He proceeds to tell me about this great health care sector fund he has for me and gives me a one page summary sheet. He shows me that the annual expenses are only 1.16%. I point out to him that I consider such fees to be high. His reply was, "Oh no, no, no - you misunderstand. These are the expenses, not the fees."
"OK, so what are the fees?"
"There are no fees."
"I'm confused. If there are no fees, how does the fund pay its bills."
"From the annual expenses. But don't worry, you never see that."
"But I'm seeing it right now on the page that you gave me!"
"No - those are the expenses, not the fees. The expenses pay for the managers employees salaries, subscriptions and trading costs. And that amount is automatically deducted from the daily return. Just like if we offered a CD at 0.75%, before expenses it's really 0.95% but you never see the 0.20% expenses."
"But that's why I would simply buy the highest net return CD rate available. Those fees matter too! As for the mutual fund, why wouldn't I just buy a similar fund with a much lower fee, such as a Vanguard fund."
"You could, but this fund doesn't have ANY fees - these are expenses."

After feeling like I was in the Spinal Tap movie discussing the amp going to 11, I moved on.

"Tell me how you get paid?"
"There is a one time 5% charge when you buy the fund. But the longer you stay in the less it averages out to."
"But you keep the 5% regardless of how the fund does, so it really never averages out, does it?"

About that time the box lady came over and the advisor gave me his card and some fund material and I left.

They must make a fortune off of the unwashed masses walking into the bank. After that bizarro discussion, I am firmly convinced that the law should provide that a person must be accompanied by an attorney before speaking with a 'financial advisor'. We need a Miranda rule for investing.
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Old 06-02-2016, 11:06 PM   #2
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Although I'm sure you know, a good attorney is not necessarily good at personal finance. So in your case, you might just have ended up educating two rather than one. Personal financial literacy and self-defense trumps all.
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Old 06-02-2016, 11:21 PM   #3
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This is exactly how I learned that the fellow in the bank was NOT a bank employee like the tellers.
I made this mistake once, paying the 5% diminishing backend load, with high expenses.
Yes they can easily fool elderly folks into "investing" with them.
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Old 06-02-2016, 11:30 PM   #4
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Well, they are actually expenses, not fees. That's why it's called the expense ratio ER, not the fee ratio.

Yes, the fund managers get paid out of the fund expenses that get taken out of the fund over a year, and all published performance data is net of those expenses. To the fund holder they will appear invisible because you only see the net after expense performance.

What he glosses over is that funds with lower expenses will usually have higher performance.

Now that 5% charge to buy into the fund is definitely a fee. So not sure how he could say there are no fees. Although sometimes they are referred to as sales charges, so maybe that's his "excuse".
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Old 06-03-2016, 05:37 AM   #5
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I had the exact same experience when meeting with my first " guy" who was recommended by my boss. The guy talk in circles just like the OP's guy. I was too stupid and my boss used the guy and he's the " expert", and Did I mention I was stupid?
What made it worse was I sorta knew what was going on at 30 when this happened
But " he won't screw me,he's the investment guy "
Sad to say I did that several more times before I saw some of the light
And then was blinded by the light you all shined many years after
" thanks for the light"
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Old 06-03-2016, 06:47 AM   #6
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Quote:
Originally Posted by pablo View Post
So I was in my local bank branch earlier today to put an item in my safe deposit box. While I was waiting for the box lady, the branch's 'financial advisor' wandered over to me (he must've just finished counting his 2%). He asked if we could talk and I said "sure". Thought I'd have some fun.
He proceeds to tell me about this great health care sector fund he has for me and gives me a one page summary sheet. He shows me that the annual expenses are only 1.16%. I point out to him that I consider such fees to be high. His reply was, "Oh no, no, no - you misunderstand. These are the expenses, not the fees."
"OK, so what are the fees?"
"There are no fees."
"I'm confused. If there are no fees, how does the fund pay its bills."
"From the annual expenses. But don't worry, you never see that."
"But I'm seeing it right now on the page that you gave me!"
"No - those are the expenses, not the fees. The expenses pay for the managers employees salaries, subscriptions and trading costs. And that amount is automatically deducted from the daily return. Just like if we offered a CD at 0.75%, before expenses it's really 0.95% but you never see the 0.20% expenses."
"But that's why I would simply buy the highest net return CD rate available. Those fees matter too! As for the mutual fund, why wouldn't I just buy a similar fund with a much lower fee, such as a Vanguard fund."
"You could, but this fund doesn't have ANY fees - these are expenses."
You should have asked him "Who is on first?"

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Old 06-03-2016, 07:50 AM   #7
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Vanguard's prospectus refers to them as fees and expenses.

Quote:
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and holdInvestor Shares or Admiral Shares of the Fund.
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Old 06-03-2016, 07:56 AM   #8
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I think the problem here is that Pablo wants to use the terms "fees" and "expenses" interchangeably while Mr. Salesman does not. I'll go with Pablo's usage because in the end they all come out of the fund's return.


My favorite line in this "Who's on First?" impression was: "But I'm seeing it right now on the page that you gave me!"
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Old 06-03-2016, 07:57 AM   #9
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The question to ask is, what's the bottom line difference to me in fees vs expenses? A fee is something I pay. An expense is something that reduces my return. Either way I have less money no matter which it is.
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Old 06-03-2016, 08:10 AM   #10
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That's pretty sad. I've never invested through a bank and never will.


My Dad once tried his hand at being a financial advisor at A.G. Edwards. He had one older couple come in and ask all kinds of questions about various investments. Dad patiently answered their questions and they thanked him and left. When they never got back to him, he called and found that they'd visited him on the advice of the nice lady at the bank. She'd told them to go see a financial advisor to explain the products and then come back and she'd sell them what they wanted. More than once he'd find someone through cold-calling whose CDs were about to renew and convince them that they needed to put some in equities. As soon as the bank people found out they didn't want to renew the CD because they were planning to buy mutual funds, they'd swoop in and sell them to the customer, even though Dad was the one who had educated them and sold them on the idea.
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Old 06-03-2016, 08:22 AM   #11
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So was there a 12B1 fee for the fund? They're listed as part of the funds ER? Is that an expense or a fee? It's called both.
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Old 06-03-2016, 08:28 AM   #12
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So was there a 12B1 fee for the fund? They're listed as part of the funds ER? Is that an expense or a fee? It's called both.
Back in my early working days in the actuarial field, I was introduced to a term called, "Expense fee." Is THAT an expense or a fee? Or both?
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Old 06-03-2016, 08:59 AM   #13
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Most mutual fund prospectuses and discount brokerage or fund family web sites use the combined term "fees and expenses" and list everything - the expense ratio, and sales loads, any transaction fees, and short-term trading fees that could be incurred.
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Old 06-03-2016, 09:30 AM   #14
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We need a Miranda rule for investing.
And your post should be included in EVERY "Investing for Newbies"-type Tutorials. Well put.
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Old 06-03-2016, 09:35 AM   #15
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I've told this story before, but it sums up my respect for "financial advisors" associated with banks.

I was transferring funds from Fidelity to Vanguard and went to my credit union for a medallion signature guarantee. The clerk doing it disappeared into the copy room to make copies for their records and came back with word that their advisors had looked at my new investment choices and felt I should do something differently. It was all I could do not to demand to see the manager and get this guy fired.

They hold my checking account, but I'd never invest with them.
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Old 06-03-2016, 09:48 AM   #16
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My friend's sister called me several months ago about a possible investment. She has no knowledge of finance or investing and is quite naive in general. She has six figures sitting in a savings account (from an inheritance). When she was at the bank, the branch financial advisor corralled her and was trying to convince her to buy an annuity. "You can't lose", was his general claim (I've heard this same claim at the racetrack). Thankfully she didn't immediately sign up - she first called me. I gave her a few simple questions to ask him: what is the yield, what are the penalties for withdrawal, and very importantly - what are the fees?
A week later she calls me back and proudly tells me that the financial advisor assured her that the annuity he is selling has no fees. I spend some time telling her that the bank is not a charity and there are fees being paid. So I instruct her to go back and ask him a simple question: how much is he making on this proposed sale? And if he claims he is making nothing, ask him to put it in writing that no fees or commissions of any sort will be paid to anybody, including him.
She called me back the next week and said that the financial advisor, in reply to her reading the questions from a piece of paper, tried convincing her that she has to trust him and if she needs to read prepared questions from a piece of paper, well, she is insulting his professionalism.
I told her to never walk into that branch again! So far, so good.
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Old 06-03-2016, 09:52 AM   #17
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After feeling like I was in the Spinal Tap movie discussing the amp going to 11, I moved on.
Great write-up, this was exactly what I was thinking just before you mentioned it yourself.



This fund has no expenses fees.
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Old 06-03-2016, 10:18 AM   #18
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You should have asked him "Who is on first?"

It took about 70 years, but it finally happened ... Hu's on first. - Imgur
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Old 06-04-2016, 10:16 AM   #19
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My neighbor has had about 100k at wells fargo advisors since 2007. He was looking at his statements and realized he has paid wells fargo over 7k in fees over the years. He has a small negative total return as well. I couldn't help but tell him he also is paying annual expense on all of the funds they have him in as well... I suggested he give Vanguard a call.
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Old 06-04-2016, 01:44 PM   #20
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We need a Miranda rule for investing.
The first two lines of a Miranda rule for investing should go something like this;

You have the right to remain stupid.

Anyway I can take advantage of and make money from you, I will.



Feel free add and embellish the rest.
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