Sammi is very comfortable. But don’t get too complacent about your nest egg costs.

 Nine Rules to Save Investment Costs

By Steve

The long-term effects of investment costs are shocking. Below are nine guidelines to lessen their negative impact. Everybody with a little common sense would choose to pay less for a product or service of equal quality. If two dealerships offer a new car of the same year and model at different prices, we would opt for the lowest cost. But why does this strong and compelling motivation evaporate in personal finance?

Uncovering and comparing the service prices of a financial adviser was never easy or transparent. Most people think the service is free. So, they don’t bother to check. The industry is motivated to keep costs (and investing) complicated and difficult to find.

Here is what I do to reduce and keep my investment costs extremely low:

1. I don’t pay commissions!
2. I buy and hold my investments just like my house. The vast majority of people don’t trade homes frequently, so why trade investments often? My late husband, Dan, and I were no different–we owned our Los Angeles and our 2nd home, a Palm Springs vacation home, for 27 and 25 years respectively. After selling the above properties in 2008, I have lived in my current home for a decade. I have no plans to sell it.
3. I don’t have my retirement nest egg in an expensive full retail financial firm.
4. This is the most challenging rule: I self-manage my investment portfolio without an expensive financial adviser. Even the fee-only fiduciaries can be expensive. This rule requires effort, persistence, and learning.
5. I buy lots of insurance protection and happily pay top premium$. But my home, auto, earthquake and umbrella insurance are separate from investments.
6. I use my local credit union for my checking and savings account. Their fees are lower than the behemoth, full-service banks.
7. I pay off my credit card every month.
8. I Invest my retirement nest egg with two of the most respected institutional giants in the industry–Vanguard and TIAA (Teachers Insurance Annuity Association).

Vanguard and TIAA have never charged commissions or expensive costs in their entire history. TIAA is a prestigious pension firm celebrating its 100^th anniversary and Vanguard is 42 years old. Vanguard offers many index investments, mutual funds and ETFs that charge less than .10%. TIAA costs are slightly higher because they are chiefly vendors for employer-sponsored Tax-deferred retirement plans, especially with higher education. Looks like many people understand how costs eat away at their nest eggs. 25 million clients invest a combined total of $6 trillion of their nest eggs with these well-known businesses. I am proud that I am one of them, and count my blessing for knowing enough to not need an expensive adviser.

 

9: Because I invest 100% of my nest egg in Vanguard and TIAA with their broadly diversified, low-cost, stock index and bond funds, I pay only .07% in fees.

 

If any of the large financial brokerage firms such as Wells Fargo Advisers, Goldman Sachs, JPMorgan or Morgan Stanley, are managing your investments, you are paying for retail service. Three percent (3.0%) is not an unusual cost for their services which includes a broker. I have had insurance agents tell me and my friends, “my company pays me the commission, not you.” Don’t believe it!

Hiring a private fee-only fiduciary financial adviser is a positive direction away from those greedy Wall Street firms. But if you believe that you can simply take all of your financial statements and documents to one of these advisers and let them do all the work with zero responsibility coming from you, they may charge you up to 5.0%. However, if you work with them at some capacity, you might be able to negotiate a reasonable price.

I have read on one adviser’s website and talked on the phone. She verified what she posted on her website. For example, her firm charged a minimum of $5,000 for a portfolio of $100,000. That’s 5.0%! Just Google “fee-only financial advisers” and check out their fees or call them to ask questions.

5.0% Retainer is a bonafide RIP-OFF!

There is an escape route from that hornet’s nest of excessive costs for financial advice and management. If you transfer your money to either Vanguard or TIAA and you follow the above nine saving money rules, your portfolio costs will drop like the temperatures in the Arctic after summer.

I try to practice what I preach. As mentioned in Rule # 9, I with Vanguard and TIAA. I pay no commissions. I manage my portfolio without an adviser and I seldom trade investments. Not surprising, my portfolio cost is a minuscule .07% (7/100) because I religiously follow cost reduction principles listed above for years.

 Illustrating how devastating costs over 1.0% is and how minuscule my .07% cost really is! This is the price comparison I was talking about at the introduction of this post.

Let’s put these numbers to work. The Table below illustrates the huge cost differences with five sample portfolios. Even on the small $25,000 portfolio, $18 per year (in GREEN)that I would pay for Portfolio #1 is a lot lower than $1,250 per year at 5.0% cost or $388 for a more reasonable 1.35% (in RED).

 

 

 

Steve’s Bio:

Stephen A. Schullo, Ph.D. (UCLA ’96) taught in the Los Angeles Unified School District (LAUSD) for 24 years and UCLA Extension teaching educational technology to student teachers. Steve wrote investment articles for the United Teacher-Los Angeles (UTLA) newspaper for 13 years. Thrice featured retirement plan advocate in the Los Angeles Times and U.S. News and World Report. He co-founded an investor self-help group 403bAware for teacher colleagues and wrote 7,200 posts in three investment forums since 1997. Frequently quoted by the media, testified at California State legislative hearings and honored with the “Unsung Hero” award by UTLA for his retirement planning advocacy.

For the last 12 years, he served on LAUSD’s Investment Advisory Committee as a “Member-at-Large” and former co-chair. The committee monitors the 457b/403b/PARS of 55,000 former and current LAUSD employees, worth $2.5 billion in total assets.