No free lunches, no fee-free IRAs

Don’t let hidden fees take a bite out of your IRA

Let’s get this straight: There are no free lunches and there are no free—despite the advertisements you see to the contrary—IRAs.

Apparently, some brokerage firms are telling white lies: “Broker-dealers’ marketing campaigns often emphasize that fees are not charged in connection with their retail brokerage accounts and IRAs,” the Financial Industry Regulatory Authority, known as FINRA wrote in a recent notice sent to the firms it regulates.

But the truth of the matter, according to FINRA, is this: “…while certain types of fees may not be charged, others will be.”

In fact, IRA account owners are likely to face at least three types of fees: those associated with the account itself; fees associated with the investments in the account; and fees associated with ancillary services provided by the broker-dealer.

Are fund investors too optimistic?

Investors poured a record amount of money into mutual funds and ETFs in July. Plus: a tax-advantaged fund that yields 7.9%.

Given that, and given what’s being advertised by broker-dealers, FINRA expressed in its notice, that “some broker-dealers’ communications that discuss fees may not be fair and balanced, and could be misleading.” (Misleading? In this establishment? I’m shocked I tell you, shocked.)

So, in light of the misleading going on, FINRA offered broker-dealers some pointers on the right way to advertise their IRAs. And we can take from those pointers items that you as a potential or current IRA owner might want to consider before opening an account with this or that broker.

No such thing as ‘free’ or ‘no-fee’ IRA

First off, potential or current IRA account owners should not be fooled into thinking that there are free or no-fee IRAs. “Accounts offered by broker-dealers may be subject to fees for opening, maintaining or closing accounts,” FINRA said in its notice.

Unfortunately, that’s not what’s being presented to your average potential IRA account owner. In fact, FINRA noticed “overly broad language” in sales material from broker-dealer implying that there are no fees charged to investors who have accounts with the firms.

In other instances, FINRA said it observed that specific fees that are not charged are highlighted and separated from disclosure regarding other fees that may be charged. And this kind of sales material “may mislead investors regarding the cost of opening, maintaining or closing an account,” FINRA said.

“Because closing and maintaining accounts typically involve some cost to investors, either associated with the account itself, the underlying investments or the services of the broker-dealer, it would generally be inconsistent with FINRA Rule 2210’s requirements to claim or imply that accounts are ‘free,’” FINRA said in its notice.

In fact, FINRA said firms that refer to an IRA account as a “free IRA” or “no-fee IRA” where costs exist would fail to comply with its rule that prohibits “false, exaggerated, unwarranted, promissory or misleading statements or claims.”

According to FINRA, its rule 2210 requires that broker-dealers’ communications are fair and balanced and do not omit material information that would cause them to be misleading. That rule also requires that communications provide a sound basis for evaluating the facts with respect to any product or service. So, FINRA said, claims regarding fees must be accompanied by clear disclosure of the types of fees that may be charged.

In other words, FINRA said, if an account offered by a broker-dealer involves account maintenance and closing fees, fees associated with the ownership of investments in the account or brokerage service fees, a stand-alone claim such as “Start investing for less with no account opening fees” would not comply with the rule.

“The claim could be compliant, however, if it explained other fees that applied,” FINRA said. For example, FINRA said the following modified claim may be fair and balanced: “Start investing for less with no account opening fee. Other account fees, fund expenses, brokerage commissions and service fees may apply.” (Of course, that kind of language isn’t likely to persuade anyone to open an IRA, but then again, them’s the rules.)

“In addition, investment products will have their own associated costs such as brokerage commissions, management fees and other product-level expenses. Further, retail brokerage accounts and IRAs may also be subject to additional fees for ancillary services provided by the broker-dealer.”

Pay attention to footnotes

According to experts, if a claim is important, it shouldn’t be a footnote, in little itty-bitty type. But FINRA said some firms have published communications that feature prominent claims regarding an account’s fee structure with only a footnote to disclose information about other fees that may apply.

This type of presentation, FINRA wrote, doesn’t comply with yet another of its rules, Rule 2210(d)(1)(C), which “provides that information may be placed in a legend or footnote only in the event that such placement would not inhibit an investor’s understanding of the communication.”

In its notice, FINRA said, “a headline statement to the effect that a firm does not charge annual maintenance fees should include an explanation in close proximity to the headline of the conditions associated with the offer and the other fees that would apply.”

For example, FINRA said, an advertisement could discuss the lack of an annual account maintenance fee as follows:

“There is no annual maintenance fee if you keep a minimum balance of $5,000 in the account. Account opening and closing fees may apply depending on the amount invested and the timing of the account closure. There may be costs associated with the investments in the account such as loads, expenses or brokerage commissions. Fees for optional services may also apply. Click here for a full explanation of our fees.” In this example, FINRA said the “click here” would take the reader to a comprehensive fee disclosure.

Other fees to worry about

FINRA also noted that IRA account owners and would-be IRA account owners should also be aware of other fees associated with their accounts. For instance, FINRA said investment products will have their own associated costs such as brokerage commissions, management fees and other product-level expenses.

And, retail brokerage accounts and IRAs may also be subject to additional fees for ancillary services, such as wire transfers, provided by the broker-dealer, FINRA said.

What experts say

Experts, meanwhile, offered this advice to consumers in the wake of FINRA’s reminder to broker-dealers.

“In general, IRAs are more transparent and have fewer extra fees than 401(k) plans do,” said Christine Benz, the director of personal finance at Morningstar, a financial services industry research company. “Nonetheless, consumers can run into fees at a fee different levels with their IRAs; the presence of these fees will vary by provider, the type of investments an individual chooses to populate his or her IRA, and the investor’s own trading patterns.”

In a worst-case scenario, an IRA investor might be paying ongoing account-maintenance fees levied by the brokerage firm, above-average fund expense ratios, and commissions to buy and sell, Benz said. “But it’s not difficult to skinny those fees way down by opting for commission-free funds or ETFs and investing with a firm that doesn’t charge account-maintenance fees,” she said.

Another expert noted that investors who focus on the allure of paying no fees to open an IRA might be losing sight of the forest for the trees.

Many firms are now waiving their annual ‘account fee,’ but that in no way means your IRA will be free, said Chad Griffeth, the co-founder and president of Minneapolis-St. Paul–based BeManaged, a firm providing fee-only 401(k) advice.

According to Griffeth, the fee or fees you should be focused on are those of the investment or investments you choose in the IRA. For example, if you are a do-it-yourself investor, saving $30 on an annual account fee on your $300,000 rollover only amounts to 0.0001%, while saving 0.25% on the investments in your portfolio could save you $750 per year.

In addition, Griffeth said. investors who would like to work with an adviser should be asking how the adviser compensated: whether there are commissions, or commissions and fees (sometimes called fee-based), or fees only; whether the advisers is acting as a fiduciary; and what the adviser would make based on the investments/products they are recommending.

To help ensure fees take as small a bite out of your IRA as possible, Benz offered this advice: “Do your homework on account-maintenance fees as well as which investments are available without a commission. Firms often offer ‘the house brand’ of funds without a commission, but those might not necessarily be the lowest-cost options or the ones you want to buy or those that are best of breed within their categories. So it is important that your due diligence goes beyond checking to see that the brokerage or mutual fund firm where you hold your IRA has an impressive number of commission-free ETFs or funds. Also make sure that the quality is good.”

Retirement Expert: Robert Powell

Robert Powell is a featured writer on the MarketWatch Retirement blog, a Research Fellow at the California Institute of Finance, and  a Featured Contributor here on the CIF blog.

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