An irreverent Wall Street Blog
by Bill Singer

SEC Investor Bulletin

February 24, 2014

The Securities and Exchange Commission's Office of Investor Education and Advocacy recently published an informative and helpful Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio. I urge all investors to familiarize themselves with the concepts set forth in this excellent guide.  As aptly noted in the Bulletin's preamble:

As with anything you buy, there are fees and costs associated with investment products and services. These fees may seem small, but over time they can have a major impact on your investment portfolio. . . 

The Bulletin offers charts that depict the cumulative costs of fees over a 20 year period, which is a superb graphic representation of the sometimes hidden and often misunderstood nature of various investment products. A particularly useful section of the Bulletin, is found under the question: What is an example of a transaction fee? (reprinted in full-text below):

Commissions. You will likely pay a commission when you buy or sell a stock through a financial professional. The commission compensates the financial professional and his or her firm when it is acting as agent for you in your securities transaction.

Markups. When a broker-dealer sells you securities out of its inventory, the broker-dealer acts as a principal in the transaction (that is, selling to you directly the securities it holds). When acting in a principal capacity the brokerdealer generally will be compensated by selling the security to you at a price that is higher than the market price (the difference is called a markup), or by buying the security from you at a price that is lower than the market price (the difference is called a markdown).

Sales loads. Some mutual funds charge a fee called a sales load. Sales loads serve a similar purpose to commissions by compensating the financial professional for selling the mutual fund to you. Sales loads can be front-end in that they are assessed at the time you make your investment or back-end in that you are assessed the charge if you sell the mutual fund usually within a specified timeframe.

Surrender charges. Early withdrawal from a variable annuity investment (typically within six to eight years, but sometimes as long as 10 years) will usually result in a surrender charge. This charge compensates your financial professional for selling the variable annuity to you. Generally, the surrender charge is a percentage of the amount withdrawn, and declines gradually over a period of several years.

Compliments to the SEC's  Office of Investor Education and Advocacy for producing a compelling Bulletin written in easy-to-understand language.


Don't miss today's earlier BrokeAndBroker.com Blog: "Winery Sour Grapes Yield Outside Business Harvest"

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