How to Spot Hidden Fees in Financial Products
Fees are everywhere! Don’t believe me? Just look at what’s been happening at Southwest Airlines lately. Want to check a bag? That will be $35. Want to check a second bag? You must be rich; that will be an additional $45. Not that I blame Southwest. They’re just matching what other airlines have been doing for years, but it has caused quite a negative reaction on social media. While many criticize Southwest for adopting these fees and even threaten to take their business elsewhere, I wonder why we don’t see similar reactions to fees in financial products. Are these fees hidden, or is nobody looking?
FINRA (Financial Industry Regulatory Authority) requires all brokerage firms to disclose fees and commissions. In fact, you have probably seen countless fee disclosures, but with a myriad of terms like Expense Ratio, 12b-1 Fees, Bid-Ask Spread, Management Fees, and 2-and-20, it’s easy to skim over these disclosures and assume all fees are created equal. That would be like assuming all chicken sandwiches are created equal, but instead of missing out on a delicious Chick-fil-A sandwich (or Popeye’s for you select few), your investment returns are eaten away year after year. All other things being equal, the lower the fees, the higher your return on investment.
For example, imagine you want to invest $10,000/yr in an S&P 500 index fund for 10 years. There are two funds available that are identical except for the expense ratio (the amount you pay for fund management, administration, etc.). Let’s pretend Fund A has a 1% expense ratio and Fund B has a 1.5% expense ratio. That 0.5% difference doesn’t sound like much. If Target had a .5% sale, most shoppers would hardly bother to make the trip. Many investors feel the same about a .5% difference in fees … little do they know. In our example, that .5% difference causes Fund A to earn over $5,000 more than Fund B after 10 years. If you are not comparing fees, it’s like leaving money on the table.
Are all fees bad? Not necessarily. While index funds have famously low fees and historically produce very good returns (see Warren Buffett’s 2016 Letter to Shareholders), if you pay an extra 1% in fees and your return is 5% higher, the fees were worth it. The overall return on investment (ROI) is higher. Paying higher fees may also make sense to diversify or make a certain type of investment. For example, if you want to invest in gold or silver during uncertain economic times, the management fee for a trust to hold bullion may cost more than the commission for shares in an AI startup. However, the perceived safety of gold or silver may be worth the fee in this scenario.
Fees are not unilaterally good or bad. They should, however, be considered in every investment decision because they will impact your overall return. Read the fine print. Ask questions if you’re meeting with a financial advisor. Do a quick search on Morningstar.com to find expense ratios for many investments.
Fees in financial products may seem hidden to some, but more often than not, I think it’s because we, as the investing public, are not looking. That won’t be you. You’re a savvy investor. Just like checking for baggage fees before booking a flight, I encourage you to consider the fees before making your next investment. Happy investing!
About Sean Webster
Sean Webster is the Controller of Zeeco, a multi-national manufacturing company headquartered in Tulsa, OK. Sean joined Zeeco in 2022. Prior to his current position, Sean was the Assistant Controller where he oversaw the U.S. accounting segment. Sean has over ten years of experience leading accounting teams, analyzing financials, and completing complex transactions.
Before joining Zeeco, Sean held positions of increasing responsibility at Helmerich & Payne and spent 5 years developing the finance function at tech startup, Viatrax Automation. Sean is a Certified Public Accountant (CPA) licensed in the state of Oklahoma.
A native of Pryor, OK, Sean earned a Bachelor of Science in Business Administration in Accounting in 2014 and a Master of Business Administration in 2015 from the University of Tulsa. In his free time, Sean enjoys spending time outdoors where he plays tennis, runs marathons, and spends time at the lake.