The main investment vehicles for people should be mutual funds, not whole life or annuities. There are many types of mutual funds such as actively managed funds and index funds. These also have many different strategies for paying the managers of these funds.
I have already discussed fund expense ratios in a previous post.
Another type of expense, that you should never ever pay, but is extremely prevalent in mutual funds, is what is called a “front load”.
What this is is basically a percent of your investment taken each time you make a deposit.
When many people retire they start to look for financial managers to help them manage their money. What often happens is the manager recommends moving the person’s money from the current custodian (the company that holds your 401k, 403b, 457, IRA, etc) to their custody. They do this because they want to be able to direct your money to funds under their control. When they do this the often charge a front load for moving your money into their new funds.
If you move $100,000 they can charge between 5.75% and 10%! That’s between $5,750 and $10,000! So your first year you will only have between $94,300 and $90,000 left to invest! You’ll need a return that first year of 6% and 11.1% just to get back to the amount of money you had started with! If you have more than $100k, they will take more right off the top!
Moving $250k? They could take as much as $25,000 immediately! This is a crisis to your net worth and one of the big reasons I became a financial advisor, to help people avoid this situation.
The truth is many people should not move their money from their current custodian. There are often funds available that are good cheap funds with no loads. If that is not the case, most people should move their money to Vanguard or another custodian to funds that have low expense ratios and no loads!
There is another load, called a “back load” which is a percent of your money removed but it’s taken out when you withdraw the money instead of when you invest. These should also be avoided completely!
If you have a current financial advisor you should ask them immediately if the funds you are invested in charge any load.