Money for nothin’, at investors’ cost

If you’ve been in the market you likely are very happy with your returns. What you probably don’t know is that these returns could have been higher if you used certain brokers to execute your trades.

Many individuals spend precious little time discovering the hidden costs of investing in the markets. This is especially true for the little guy who either doesn’t know that there are hidden costs or thinks that these costs are seemingly so low they are of little consequence. Of course, nothing could be further from the truth. Consider the insanity of investing in highly managed mutual funds or ETFs compared to those tracking various indices. With the former, you can annually pay one percent or more for the privilege of underperforming the index funds that charge in the area of a tenth of a percent. Each year the return is lower and most damaging is that there is therefore less money to invest in coming years, thus reducing the return even more dramatically. And this viciously negative cycle continuing for the lifetime of investing can easily cost the investor tens, if not hundreds, of thousands of dollars.

But what the editorial below from The New York Times speaks to, in part, is a much more sinister tactic by some in the brokerage business. In this situation there is no easy way for investors to know the complete cost of doing business with their brokers. Serious questions have to be asked and answered when a broker charges you for executing a trade and then gets a kickback…I mean, rebate, from the other end of the transaction. It reminds me of what the horse racing business has been trying to stamp out for years. i.e. The advisor to the buyer receives compensation from that buyer and then finds an amenable seller who will pay a commission on a sale. Take a wild guess what happens next?

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