Fake Free

The Hidden Costs in "Free" Investments: A Guide

The allure of investing is powerful, and the promise of "free" or "low-cost" options can be especially enticing. But as many seasoned investors know, the landscape is fraught with pitfalls and hidden costs that can erode hard-earned gains. It's imperative to be aware of these potential traps to make the most of your investments.

Back-End Load Funds

These funds may seem free upfront, but they charge you upon exit, with fees decreasing over time. This structure can lead to unexpected costs if you decide to sell your shares early.

Insurance Products with Hidden Commissions 

Certain insurance products, like annuities, come packed with high hidden commissions for the brokers selling them. While they may promise guaranteed returns, the real cost can undercut potential profits.

Funds Paying Brokers with Your Money

Some funds incorporate 12b-1 fees, designed to cover advertising costs or to incentivize brokers. While seemingly small, these fees can compound and eat into your returns over time. Just keep an eye on the total expense ratio.

Closed-End Funds and Underwriting Commissions 

When investing in Closed-End Funds, a significant portion of your investment might be taken as an underwriting commission. This fee reduces your initial investment capital, affecting your potential returns.

The Hidden Spreads in Cryptocurrency

Cryptocurrency, a burgeoning field, comes with its own set of pitfalls. Due to lighter regulations, the spreads (differences between buying and selling prices) in crypto can be exorbitant compared to traditional stocks or bonds. These costs, often unseen by the novice investor, can significantly impact potential gains. If you want to do a test, start with $100 and buy your favorite crypto, then sell, then buy again. Do this 100 times in one day and see what you have at the end of the day.  That doesn't happen with Microsoft stock with a $0 commission broker, though the bid ask spread loosses can add up with rapid trading as well the factor is perhaps 100th as much in spread losses.

Bond Selling in Brokerage Accounts  

When selling bonds through brokerage accounts, there might be additional costs or fees associated with the transaction, which can reduce your overall return. These fees exist in buying, but typically you are buying bonds at the offering (where the seller pays) and you get hosed on the sale. Try to let indivudal bonds mature or bo with bond funds.

Investment Advisors Billing Directly

Many investment advisors bill fees directly from your account. While this may seem convenient (and makies tax sense with non Roth IRAs) it can often go unnoticed where clients don't know what they are paying or if they are paying at all.

Brokers Masquerading as Advisors  

Many brokers label themselves as "financial advisors" or "planners." However, unlike Registered Investment Advisors (RIAs), they can receive commissions from selling specific products. This commission-based structure can create conflicts of interest and hidden drains on your investments.

Advisors Pretending They're Always a Better Deal Than Brokers

A yearly advisor flat fee is only better than a broker taking high commissions. A 1.5% per year RIA, or Registered Investment Advisor, is making more off your account than an old-fashioned broker just charging high commissions to buy stocks - even more than some brokers make off load funds. While RIAs (supposedly) have your best interest in mind, compared to brokers who only have to sell you appropriate investments (and can favor higher hidden fee choices), don't believe the ads that say, 'when you do better, we do better,' as if they don't make money when you are down. Brokers do better when you do better too because it means higher commissions on bigger investments.

The Illusion of "Free" Bank Accounts  

Banks might offer accounts that seem free, but there's a hidden cost. While you earn near-zero interest on your deposits, the bank might be making 5% or more by lending out your money. Your real cost is the difference between your yield and what you could get investing for no risk in T-Bills or a government securities money market fund. 

Conclusion

In the world of investing, transparency and due diligence are paramount. The hidden costs, often lurking in the shadows of seemingly attractive offers, can prove detrimental to your financial growth. Whether it's high spreads in cryptocurrency, undisclosed commissions in insurance products, or the subtle fees in "free" bank accounts, being aware of these pitfalls is crucial.

Have you heard the famous quote "If you have to ask the price, you can't afford it"?

Well that quote was from famed banker J.P. Morgan. Those selling investments don't want you asking what the cost is. 

"If you don't know what the cost is, you can't invest." - ZeroVest