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Fire Your Broker and Earn 25% Higher Returns

Do you know how much money your 401(k) is costing you?

If you’re like most Americans, this might seem like an unusual question. Most of us associate investment accounts with making money, not spending it.

The fact is: your IRA or 401(k) is a financial product. And just like any product in the market – from milk to a Lexus – there’s a price tag. And you may be paying much more than you’d expect to fund your retirement.

Financial products are paid in fees. For example, loans charge interest. Even free checking accounts make money on overdraft fees.

Of course, it’s easy to understand your mortgage statement. You owe an amount in principal and another amount in interest. And if you make the minimum payment, you can expect to pay off your loan on a specific date.

It’s not so simple to understand a 401(k) plan. An AARP survey [1] showed that 65% of 401(k) contributors were completely unaware they were paying fees to begin with.

Perhaps one reason is because financial service providers don’t post fee information in the expected places. 401(k) fees come “off the top,” which means they aren’t documented in your monthly statement.

You’ll have to dig a little bit deeper if you want to find out what is really stunting the growth of your nest egg. A good place to start is by requesting a “fee audit” from your company’s 401(k) plan administrator.

Buyer beware: If you’ve ever felt like your 401(k) should be making more than it actually is, that’s a red-flag that you’re paying too much in fees.

Here’s what you need to watch out for…

3 fees that can shred your 401(k) returns

Below are the three most common fees that brokers charge. These are only the basic fees, but some plans charge “advertising & marketing fees” as well as others. As you’ll see, some fees are necessary. Others exist for the sole purpose of making the financial service industry more money while draining your retirement.

Fee #1: Administrative Fees

Every company has overhead expenses such as office management, book keeping, and customer service. And mutual funds are no exception.

These fees generally range from .2% to .4% annually. [2]

Administrative fees are unavoidable because without capital an investment fund can’t keep operating. And since most brokers don’t invest in their own funds (more on that below), they aren’t making money off their own investments.

Even the lowest fee funds will assess some administrative costs. Though, you’ll want to make sure you’re not paying more than you have to.

So far, no real harm. Fund managers and their employees have to make a living too, right?

As it turns out, administrative fees aren’t the only way funds cover payroll. And it’s the next type that really starts killing your returns…

Fee #2: Asset Management Fees

In active professionally managed funds, investment researchers and broker-dealers make some of their money through asset management fees. Many brokers also receive commissions from companies whose stock they recommend to clients (more on that below…)

Asset Management Fees generally range from .5% to 1% annually. [2]

That sounds like a small amount. How much of a difference could half a percent really make?

Let’s take the median Administration Fee (.3%) and add the median Asset Management Fee (.75%) and add them together. That’s 1.05%. Now let’s compare returns over thirty years with and without the asset management fees.

Let’s say, for argument’s sake, that you and your employer are contributing $7,500 of your paycheck to retirement yearly.

With an average annual fund return of 7% and an initial investment of $50,000…

With Asset Management Fees, you’d earn:

Yr 1 – $50,000                       Yr 5 – $111,503         Yr 10 – $193,613       Yr 15 – $303,237

Yr 20 – $449,592                   Yr 25- $644,987        Yr 30 – $905,853  

Now look at the SAME portfolio without Asset Management Fees:

Yr 1 – $50,000                       Yr 5 – $114,896         Yr 10 – $204,646      Yr 15 – $328,771

Yr 20 – $500,436                   Yr 25 – $737,849       Yr 30 – $1,066,193

Do the math: that’s $160,340 in extra fees.

Now, you may be thinking: “OK, but don’t I need a professionally managed portfolio to get the best rates of return?” It’s a good question, because high enough returns could outweigh the cost of fees.

But the surprising answer is “NO.” For reasons you’ll soon understand, actively managed portfolios almost NEVER consistently beat the market with a large enough margin to justify the fees. That’s almost always true, even when your employer is chipping in with a matching contribution.

But Wall Street can’t make money by encouraging you to put your money into safe investments with modest, consistent returns.

No one makes much money on index funds, where rates of return are based on the average growth of an entire market (like the S&P 500 companies). There’s no risky betting involved there. Either the average of the S&P companies grows from last quarter, or it doesn’t. And since the larger market almost always grows over time, putting your money in an index fund is a relatively safe move. And the fees are low, which means an affordable investment for you.

But most brokers would have you think otherwise…

Fee #3: Trading Fees

Here’s how the investment slaughter house goes in for the kill.

Trading fees are charged each time your broker buys and sells the securities (e.g. stocks and bonds) in your fund. Actual fee amounts vary from broker to broker. All told, it’s not unusual for fees to exceed 1.6%

How does your broker know when and which stocks to buy and sell? Well, that depends on who you ask.

Brokers are quick to make the argument that experience and knowledge of the markets puts them at an advantage to earn you the highest possible returns.

But that explanation doesn’t exactly hold water.

While it’s true that individual investors are less likely to beat the market than professional traders, professional traders are less likely to beat non-managed funds.

According to the S&P Indices Verses Active (SPIVA) scorecard, non-managed funds outperform actively managed funds most of the time. [3] That means that a professional investor has little chance of beating the market during any given year, much less year after year.

And there’s something else your broker doesn’t want you to know. Client fees aren’t the only way to get paid as a broker-dealer. Another way is to earn commissions from the publically traded companies they recommend.

Just as drug companies solicit medical doctors to proscribe their medications, publically traded companies are competing for your mutual fund dollars. And your broker is forced into a situation where he (or she) cannot represent your best interests.

Unlike a financial advisor who has a legal fiduciary duty to act in your best interests, most broker-dealers are salespeople who profit from selling stocks that pay the highest commissions.

So, Exactly How Much Can Your Broker Take?

Let’s run our 30-year experiment again, this time comparing an actively managed fund with Asset Management and Trading Fees versus a low-cost index fund.

Actively managed fund with 1.6% fees:

Yr 1 – $50,000                       Yr 5 – $109,069         Yr 10 – $185,906      Yr 15 – $285,852

Yr 20 – $415,861                   Yr 25 – $584,973       Yr 30 – $804,950

Passive index fund with .3% fees:

Yr 1 – $50,000                       Yr 5 – $114,896         Yr 10 – $204,646      Yr 15 – $328,771

Yr 20 – $500,436                   Yr 25 – $737,849       Yr 30 – $1,066,193

For a whopping total of: $261,243 in fees, or 25% lost returns!

[1]  http://assets.aarp.org/rgcenter/econ/401k_fees.pdf

[2] http://www.demos.org/publication/retirement-savings-drain-hidden-excessive-costs-401ks

[3] http://us.spindices.com/indices/strategy/sp-500-high-beta-index

How to Build a Recession-Proof Financial Fortress

Tom Daniels was an average middle-class American in the 90s. He worked for a Fortune 100 computer company that offered a traditional pension program.

He knew that a pension alone wasn’t going to help him reach his retirement goals. So when the company announced a new 401(k) program, Tom enrolled.

For several years, his 401(k) grew faster than expected. Tom was putting in the maximum 15% of his paycheck, the company was matching the first 5% in contributions, and high investment returns were starting to make retirement look possible.

Then, the dot-com crash changed everything. Tom lost 33% of his 401(k) virtually overnight.

The company responded by hiring new management and a new trustee for the 401(k) program. Now there was a broader menu of investment options with names like “growth fund” and “balanced fund.” These funds didn’t seem match individual investor plans, such as those offered by big name mutual funds.

Finally, with a cracked nest egg and more questions than answers, Tom turned to a financial advisor who understood what the plan was and new of an unpublicized “back door” that allowed participants to invest in mutual funds available to individual investors.  He put together a diversified and growth oriented portfolio. Almost immediately, the 401(k) started earning higher returns, eventually making up half of his previous losses.

Then another unexpected blow. During 2006-2009, Tom lost another 50% of his retirement. Shortly thereafter, Tom was permanently laid-off and decided it was time to get out of the roller-coaster

For the next 2 years, he looked for a way to build a solid nest egg completely apart from the stock market. He knew he had options, and also knew that he didn’t understand those options.

Then, Tom discovered an obscure 46-year-old law created by the IRS  that helped him earn worry-free consistent returns while creating 100% tax-free income for life.

Today, Tom has full confidence in his financial future. Do you?

WARNING: Proceed with caution. Taking control of your retirement requires understanding the financial system as well as the wealthiest 1% of Americans.

Being willing to take charge of your financial destiny is only the first step. If you don’t know how to navigate the latest investment laws and IRS tax codes, you’ll get slapped with penalties and interest.

3 Things Ultra-Wealthy People Do Differently

Think like the rich… earn like the rich. Here are 3 things the ultra-affluent do differently, which anyone can use to flex their money making muscle.

Ultra-Wealth Factor #1: They accept 100% responsibility for their financial results.

Wealth comes to those who are committed to success while others just sit around wishing and hoping for things to be different.

Most individuals are taking no initiative, pretending like they can wait out the crisis like a bad storm – or worse, waiting for the government to bail them out.

Well, it’s not going to happen. You alone have the power to change your financial fate.

The best time to take control was 20 years ago, but the next best time is TODAY. Seize the day.

Ultra-Wealth Factor #2: They surround themselves with others who share their goals or have already achieved them.

If you surround yourself with individuals who are willing to take shots in the dark instead of seeking expert help, you are much more likely to follow the crowd and chase the latest “hot” funds instead of playing a long game designed for YOUR goals.

Bad advice and the lack of good advice both have the same result. You should never follow the advice of someone who isn’t qualified and/or doesn’t represent your best interests. And you definitely cannot afford to plan for retirement alone.

Seek out expert help with a legal fiduciary duty to you and your money.

Ultra-Wealth Factor #3: They are committed to life-long learning

What you lack in knowledge, you pay for.

Think about it this way: if you don’t know how to seal the leak in your plumbing, you need to pay a plumber to do it. If you don’t know how to build a deck, you need a contractor. And if you don’t know how to protect and prosper your finances, you need advisers with your best interests on the line.

One True Secret About Wealth That You Can’t Buy

The One True Secret About Wealth That You Can’t Buy With Money…

You would think that “how to make more money” would be the main topic 100% of the time on a financial expertise website like The Harbor Institute.

Making money is one focus, but as you’ll soon see, it’s not really what you’re looking for when trying to build wealth.

Money is certainly important, and also makes things a lot easier when you have more of it.  But when it comes to wealth and the mindset behind money, there is something that most people overlook as they press themselves harder and harder to make more of it.

It’s the one true secret about wealth that most people are truly looking for, but sometimes never get to find because they trap themselves in an endless loop trying to make more and more money.

This endless loop can leave you feeling empty if you don’t think about the one true wealth secret being revealed in this article.

The Secret Behind Living “The Wealthy Life”…

Wealth Mindset Harbor InstituteWhen you sit down, relax, and think about what it means to be wealthy, what images come to mind?

Having a nice house?  Driving your favorite car in the countryside?  Can you hear the “clinking” sound of wine glasses at a social gathering with a bunch of your friends, living the high-life?

What about taking a trip to a remote island, complete with VIP service and excellent food, which also means you’re treated like royalty?  You might choose to stay there a couple of weeks because, you know, money isn’t an issue when you’re wealthy.

What you imagine when you think about being wealthy is up to you.  But is that truly what wealth, and a wealthy life, provides you?

What do you feel when you think of these images of being wealthy?  It’s in that feeling that lays the secret.

Do you feel relaxed?  Secure?  Safe?

The secret to a wealthy life lies in the feelings you are trying to attain, not how much money you have.  It’s whatever the “feeling of being wealthy” means for you.

Here’s how to start using this secret to your advantage…

Think about the following to start on your journey to feeling wealthy:

  • Is it “having a lot of money” or knowing that you spend way less than you earn that provides a measure of security for you? What other feelings could that bring?
  • When you buy stuff, do you factor in the cost of long-term ownership? Would you feel better knowing you’re buying the highest quality of life, or by trying to obtain some false status by owning the most expensive stuff available?
  • Buy the house, rent the house, and only enough house … not too much house (which will leave you with a bunch of unused rooms and more to clean). You’ll feel wealthy knowing you’re making the right decisions.
  • Think about your travel, and even though you might have tons of money, travel frugally. You would be surprised what the wealthy spend on a trip to Paris (because likely, they aren’t going to Paris).
  • Finally, always think about what you’re buying, it’s not the stuff … it’s the feeling, the experience, the lifestyle (but not status).

Obviously, having the proper money mindset when it comes to your wealth is a large and complex topic.  This article only represents a small sliver of the immense volume of tactics, strategies, and retirement-securing knowledge we offer our Members.

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