If you can avert your eyes from the tumult surrounding the general election, there’s something really positive happening in financial services: A long-running war on fees is heating up.
To be honest, this fee war has been going on for some time. The biggest mutual fund houses have been cutting their management fees to the bone and are taking business from the big banks and full-service brokers.
The really good news is that anyone who invests — from 401(k) to self-directed brokerage account holders — benefits in a big way. The savings add up and can pump up your nest egg.
The latest development is an announcement that Merrill Lynch (Bank of America) is eliminating commissions on individual retirement accounts (IRAs). There are a number of reasons for this move, but the big broker is trying to stay in the game in an era of bargain-basement fund management.
Is Merrill suddenly looking out for the best interests of its clients? I don’t know what the firm’s corporate policy is, but it’s clear that new Department of Labor conflict-of-interest rule has become the menacing whale in the financial services industry.
The DOL rule, although still riddled with loopholes, does something that few in the brokerage business sought to do: Put investors’ interests first. In most cases, that means avoiding commission-based and high-fee products.
Although the brokerage and insurance industries want to kill the DOL Rule — they are suing the government and lobbying their GOP allies in Congress to snuff it — the rule will likely go into effect next year.
The mutual fund industry, even before the DOL rule was even proposed, has been lowering management fees for decades — well, at least a handful of major mutual fund companies. Led by the Vanguard Group, other companies such as Fidelity, iShares and Schwab have been cutting expenses.
Schwab, for example, cut its fund fees two weeks ago. Fidelity and iShares are also marching to that drummer.
How low have fund fees gotten? The Schwab U.S. Broad Market ETF (SCHB), for example, charges a paltry 0.03% annually for management expenses. The Vanguard Total Stock Market ETF (VTI) charges 0.05% annually.
How much are you paying? Keep in mind that you don’t have to use a broker or adviser for any of your fund investments. You can go directly to fund companies or robo-advisers that charge low fees.
So if you’re looking at any investment from an IRA rollover to your own 401(k), go cheap. The lower the cost, the better.
Where do you find the lowest-cost funds? One of my favorite sources is ETFdb.com, which tracks exchange-traded funds.
Another place to look is the platforms offered by the big fund firms, mentioned above. Most of them offer everything from low-cost, commission-free annuities to low-cost brokerage services.
If you want one-stop shopping, they can save you a lot of money. I’ve invested in several products from these groups and even use them for occasional financial planning.
The big takeaway from the financial fee war is that it’s never been more competitive. Shop online for the lowest-cost product and build your nest egg.