Which Fees Cost You the Most?

Vendors use the bait-and-switch tactic of hidden fees because the deeper you get in the purchasing process, the more incentives you have to complete it.
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This article was written by Simon Moore, of FutureAdvisor, for bill and account management service

Hidden fees are everywhere. Like many pricing tricks, they usually live in the small print.

In fact, they've become so widely used by marketeers that the Federal Trade Commission has sent warning letters about hotel resort fees, and the Department of Labor has demanded transparency in investment fees charged on retirement savings.

People have a tendency to focus on upfront costs. Vendors use the bait-and-switch tactic of hidden fees because the deeper you get in the purchasing process, the more incentives you have to complete it.

Our analysis of the average U.S. consumer's fees over one year shows that investment fees dwarf all others combined.

Travel Fees: On the Rise

Airline fees became top of mind after crude oil prices spiked in 2008. In many cases, travelers get charged now for something they used to enjoy for free, whether it's legroom or check-in luggage. That said, airline fees don't cost consumers all that much for all the attention they receive, simply because most of us don't travel enough.

Hotel resort fees leave a bad aftertaste because they're imposed unexpectedly, and like airline fees, travelers are forced to pay for what used to be free: like using the gym. These fees are sufficiently unpopular that in 2012, the Federal Trade Commission warned 22 hotel operators against the practice of "drip pricing." For example, the true price of a hotel stay often only becomes apparent upon checkout, when the $15 per night service charge appears on the bill. That said, resort fees tend to be a small share of any consumer's annual budget.

The Fees of Finance

Because of their abstract nature and complexity, financial products charge the largest fees, and they're usually hidden.

Many credit cards have upfront annual fees that they'll waive for the first year. But it's the late-payment, overdraft and swipe fees that make the cost of a credit card punishing. As much as consumers like to think they'll pay punctually and spend reasonably, many don't, and when they make mistakes, the product they have chosen is unforgiving.

The same pattern can be seen with mobile phones. Contracts are easy to enter, but the early-termination fees are huge. That sort of "easy entry, difficult exit" is a classic method by which companies take advantage of consumers. While early termination fees are large, they also occur less frequently than many others, since people tend not to enter many phone contracts at once.

You Don't Get What You Pay For In Finance

In travel, there's a clear link between fee and service. You pay more money, you get extra stuff. That's not the case in finance. Investment outcomes often worsen as fees grow, and in the case of a 401(k) fund a lot can depend on your HR department's ability to negotiate.

Beating the market is a hard business, and many sophisticated, institutional investors fail to do it. While they may seem like a good horse to bet on, retirement savers should remember that mutual funds are up against the most ruthless hedge funds and bank trading desks in the world.

Funds that invest actively and claim they beat the market charge higher fees. But whether they beat or not, as is usually the case, those fees stay high. It's a lose-lose proposition for most savers.

Annual Fees, Visualized

Chart: Average Fees For The Typical US Consumer; FutureAdvisor analysis, 2014

This chart shows the relative importance of various fees. In the case of airline, hotel and late payment fees, they're typically under $50 and paid twice a year at most.

Credit card and mobile termination fees are larger. With credit cards, it's an annual fee that can approach $100, combined with other fees that average $30 per hit.

But for the typical consumer, investment fees are at least four times as large as others. The average saver has $100,000 in savings, and a typical fund charges 85 basis points, or 0.85 percent per year.

Though that doesn't sound like much, 0.85 percent of $100,000 is $850. This is more than all the others combined. If you have investments, it pays to look for the most efficient, low-fee funds, because large fees are no signal of quality.

Simon holds the Chartered Financial Analyst designation and works on investing algorithms design. His work experience includes Putnam Investments, and the Bank of England. He has a degree from Oxford in the UK and a master's from the Kellogg School of Management at Northwestern. Simon is the author of Strategic Project Portfolio Management (Wiley, 2009).

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