These are one of the most critical things to understand about investing. Because every dollar that you spend today and fees is a dollar less that is compounding for future you. Now, I'm not saying Cesaire bad. Often times you could be getting value out of the fee that you're paying. But I want you to be really critical about that. Really, Make sure that you are actually getting value for the fee that you're paying. So we're gonna walk through different examples of fees that you, as an investor are going to encounter one of the biggest ones to understand is this idea of an expense ratio. Brokerages are not non for profit entities. They would like to make money, and one of the ways they're going to make money is by charging you for their services. And that's with an expense ratio. It usually covers the operational costs for them, and it gets broken down as a percentage of the fund's overall assets. So what does that actually look like? So if you here and I'm going again, I'm just gonna r...
eference S and P 500 index fund. Let's say that you see that in S and P 500 index fund has a 5000.62% expense ratio, which actually would be really high for an S and P 500 index fund. But we'll get to that in a second. That means that for every $1000 you've invested, you are paying $6.20 to your brokerage. So if you invested $10,000.62 dollars of that gets paid to your brokerage for the privilege of doing business with them, a passively managed fund should have a percent or an expense ratio well below 1%. Another thing to know about expense ratios is the more you invest, the lower your expense ratio is going to be. So it a lot of brokerages you will see as you level up and put more and more money in, you kind of unlock an opportunity to go into an index fund with an even lower expense ratio. So maybe you started out with one that was at half a percent, and then by the time you got $50, in that fund Oh, hello. Here you can have an expense ratio of 00.8 so you are significantly dropping how much you're paying in fees, which means a lot more is in their growing and compounding for future you. So it's always something to pay attention to. As you grow as an investor. Can I actually move this money into an even cheaper fund and save even more money over the life of my time as an investor? But here's something that's fun. Sometimes you hear this referred to as a basis point, so you might hear someone say, Oh, you haven't expense three Instead of saying expense ratio, this fund is, ah, 50% basis, or 50 basis points. I hate this term. When I was doing research for the book, I was speaking to a woman. We were talking about fees. We had been talking about expense ratios, and she just pivoted and she goes, And then that should have a basis points of probably 50. Or that should have probably 50 basis points. We went pause. What what does that mean? So let's talk about what it means. A basis point is just more confusing language, and it is 0.0.1 percent, so one basis point equals 10.0.1 percent. Better way to put it. Ah, basis points is 1%. So if you hear 50 basis points, that means half a percent same thing as it's being a fee, it's just a different way that people are expressing it. So going back to this idea of confusing language, yes. Is that be? Is that a fee that's charged over the life of that asset? Where is it? Onley? One time it's usually over the life, so an expense ratio is something that you're going to be paying every year. So it's something to pay attention to and kind of think of. It is like an annual administration cost for owning something. But obviously the higher it is, the more you pay, the less that's growing for future you. Now there are gonna be fees that we'll get into that are one off fees that happened when you buy it. Or maybe when you sell it asset under management as another term that's really critical to understand, because you need to know how your financial advisor, if you hire one, is getting paid now. Often times when we talk about wealth management, so more of those White glove full service firms they take what's called asset under management or a um, it's a flat rate, see, often something around 2%. So if you're working with done, let's say you have $100,000 portfolio. They get $2000 out of your portfolio. Now. I'm not saying that that's bad. You just need to understand the fees. And maybe this financial advisor is doing a great job for you. You otherwise would not be re balancing or diversifying or making sure your money is in the right place. But you do also need to know that's a big chunk of change to be taking out of your portfolio every year. And that's not growing for future you. So if you're paying it, just make sure that the values there we know what a commission is. A lot of us have experienced commissions at some point in our life, whether we've paid them or maybe received them at our jobs. Well, you really need to understand if your broker or your financial advisor is getting paid a commission. And here's the reason. Unfortunately, the investing industry is not regulated as tightly as I wish it was. When it comes to people who can give you advice. And there are two big terms you need to understand. One is fiduciary, these air people who are legally bound to act in your best interest. The other standard is suitability. They just can't harm you. That's a pretty broad strokes definition of what they're allowed to dio. So whatever they pick and put in your portfolio, it just can't cause you harm. So that also means that if they get a commission off of the products that they might be putting into your investment portfolio, then they're incentivized not to necessarily do what's best for you. Just what's not going to do damage to you. So that's why you need to understand how people are getting paid that you work with. Because if they're getting paid a commission is that impacting the things that they are putting into your investment portfolio, you can ask someone out, right? Are you a fiduciary? Another easy thing to do is to go to a certified financial planner. They're bound legally bound to be fiduciaries. There's also something called a fiduciary oath. You can Google that term. It'll pop up a paper that you can print out and ask your financial advisor to sign, so they are bound to be a fiduciary for you. The other thing that you can dio I'll talk at the very end about other Resource is there's one called finra f I n r a dot com. They have something called broker Check. You can plug the person's name in, and it will pull up all the different places or anything negative they've done. So anything disciplinary this happened, and if they're not registered at all, that should be a big red flag. Do you wanna really see what it looks like? Put in Bernard Madoff and see what comes up with Bernie Madoff. He's in there front and her back and load kind of ties into your question on when you pay fees, sometimes with a front end load fees, you pay it upon purchasing the mutual thunder. Investment back and load is paid when you sell it. Often times, though with back and loads, it can get reduced or phased out, depending on how long you hold the investment. Another thing to know is that index funds are generally referred to as no load funds. Often times they do not charge these fees, So not only are the expense ratios lower, usually, they also do not have front or back in load fees. That's another way that you're saving more money. So we talked about all of these fees. Where the heck do you find out where the heck these fees are? A prospectus and a prospectus is what the company of brokerages legally obligated to disclose about the fund. So the SEC, which is the Securities and Exchange Commission That's the federal regulatory body that oversees all of this? They asked the Fidelity's the Charles Schwab's The Vanguards. Those guys, they're like, Hey, you have to tell the people what's in them. What are the companies that are in your funds? What's the risk of this fund, how much these funds cost and also how have they performed in the past? All this information is included in a prospectus. You can download that directly from your brokerage. You gotta call up and ask if you can't find it. You can also go to a website called morning star dot com, the third party website that really that's all of these guys and rates them. So if you just want a way to go and see, like hey, out of five stars. How is this one stacking up against its competitors? That's an easy way to do it. Morning start usually puts the expense ratio rate up at the top. Sometimes it'll be written as e X p period ratio. Also, if you download a prospectus and just control left the word ratio, you're probably gonna find it. Yes, so if you're going through the brokerage website, there's a lot of information here. What would you say are the priorities for somebody? Toe Look for when you're trying to vet a brokerage, There's a few things that you want to look out for. I really like to check customer service personally, so I will call and see what the experience is like of reaching a real human on the phone. I also, if they have an online chat portal, I'll try using that or emailing them as well. You want to compare fees and see who charges what for the investments that you're interested in purchasing, I would also say, especially if you're a very first time investor. The user experience on some of these websites is not wonderful. They really do need to invest a little bit more time and money because it's like they just assume everybody has this experience when you don't call and talk to a human, This is really one of those times, you know, sometimes when we're in the millennial generation, like, I just want to do everything online. It really does help to call and speak to somebody, especially with investing, because I understand that feeling in that panic cause I've had it of not wanting to make a mistake. So it really is helpful to do that because these sites are not always intuitive.