fees Archives - Lazy Man and Money

Over the past week or so, I couldn’t help but notice that there’s been a cluster of news reporting around fees. What I found interesting is that two industries’ fees keep going up and up… and the third industries’ fees have gone to zero. Specifically, ATM and cable company fees continue to rise, while brokerage trading fees are disappearing.

As consumers of these services, being aware of these trends can help us make wiser financial decisions. Of course, it’s not always clear what’s going on behind the scenes, so let’s take a look at each in more detail.

ATM Fees Keep Rising

ATM fees have reached a new all-time high. According to this this USA Today article, the average cost of an ATM withdrawal is $4.72. That’s crazy.

I haven’t been following ATM fees too much because, as the article notes, fewer people are using cash nowadays. My bank, USAA, reimburses us for ATM fees since they don’t have a network of their own. However, for a significant percentage of people, this can be a pretty big hit. That’s why I recommend having a bank that reimburses some or all of the ATM fees if at all possible.

Cable Companies Hide Increasing Fees from Consumers

The headline from Ars Technica was shocking, Cable companies use hidden fees to raise prices 24% a month. Or maybe it’s not shocking since we are talking about the cable industry here. I’ve written about Cox’s banana pants pricing, anti-competitive behavior, and shady pricing tricks.

I don’t mean to single out Cox, Comcast wasn’t any better when I had them as a cable service. Consumer satisfaction surveys repeated show that people hate their cable provider. The system was designed to eliminate competition, so most consumers must accept whatever pricing and terms they can get if they want high-speed internet.

I’ll now step off that soapbox and get back to the news of the 24% increase a month. The news mostly comes down to disclosure, but there’s some interesting fees in there too. For the disclosure part, if a company sells you on a service for $99 it should be $99. If there are government taxes involved, they could clearly state exactly what those are up-front in the advertisement. It shouldn’t be, “$99, plus fees that happen to be ~25% more.”

The interesting fees that I mentioned above are not necessarily government fees. For example there’s broadcast TV fees, which is what you pay to watch NBC, ABC, CBS, etc. that you could get for free with antennas. This is a touchy subject for me. I don’t think I should have to pay for something free just because of a technology hack.

Another fee mentioned is the regional sports fees. I watch a lot of regional sports, so I don’t mind paying for it, but they used to be part of the cable package. For people who don’t watch regional sports this is just wasted money. An easy solution would be to make it a package you can optionally buy. However, why give people the choice when you can just charge them all?

It’s worth reading the full Consumer Reports PDF here.

Brokerage Fees Go Zero

In the last couple of weeks, a group of brokerages have eliminated fees for trading stocks completely. It seems like it started with Interactive Brokers Group, but I’m not familiar with them. The big news was Schwab going commission free. TD Ameritrade and E*Trade followed suit. Then Ally Invest joined the party. Literally hours ago (as I write this) Fidelity decided they’d go commission free too.

I’m old enough to remember when a stock trade could cost hundreds of dollars. Typically it was done over a phone call (gasp!) with a stock broker. You had to deal with messy fractions. With the expansion of the internet in the mid-late 1990s, E*Trade and other brokerages brought stock trading to the masses with commissions that ranged from around $10-15 a trade.

I feel this movement to commission-free trades is another revolution. I hope that it encourages more people to invest. Some people are very fee adverse (*raises hand*) and this removes that. It’s also one less thing to explain to someone new to investing.

Part of the reason of the drop to zero commission fees is the success that Robinhood has had. It’s hard to get someone to pay for something when someone else is giving it away free. That’s specifically why I opened a Robinhood account for my kids years ago. As we’ve learned in other areas of technology, something free sometimes costs you in other ways.

Consumer Reports highlights a couple of the catches:

They are trying to get new customers to sell them products with higher fees. That’s something to be aware of.
You may not earn a good interest rate on the spare cash in your account. The brokerages can use all that money and earn more interest. The good news is that with zero commissions, you could invest almost all the extra cash into a very conservative investment like Vanguard Total Bond Market ETF (NASDAQ: BND) paying a 2.5% yield (or interest rate for practical purposes). That’s what I’ll be doing.

I don’t mind these catches at all since I can control both cases well.

Final Thoughts

I find it interesting how all these fees are trending. The cable company fees are going up because of a lack of competition (among other things). The brokerage fees are going down because of fierce competition. This isn’t a surprise, but the contrast of the two industries makes it clear that regulation matters greatly.

The outlier is the ATM fees. They are going up because fewer people are using cash. It seems like that would mean that they have to physically fill the machine with cash less often. That’s logically what the fees should go towards. If that’s the case, the fees shouldn’t have to increase. I suppose the fees should also cover the rent for the physical space they take up which is a fixed cost.

The movement of these fees have been gradual over time. If not for all the news coming out at the same time, I wonder if I wouldn’t have even noticed it? Sometimes, it’s helpful to step back and look at something fresh and think about how we got to where we are.

An article from my friend, Jeff Rose caught my attention recently: Why I Hate Target Date Mutual Funds and You Should, Too. The title caught my attention – hate is a strong word that I haven’t seen Rose use too often.

For those who aren’t aware, target date mutual funds are typically designed to start out with more aggressive investments (stocks) and gradually get more conservative towards, well, the target date. The philosophy is that want to take the risks and reach for those high rewards at the beginning of your career, but as you get close to retirement, you want to preserve the nest egg. One of the biggest advantages is that you can “set it and forget it” (please don’t sue me Ron Popeil) – you can’t have to manage the portfolio, it manages itself.

The Good Financial Cents article, which I’ll get to in a minute, reminded me of my own story regarding target date mutual funds. A representative from USAA called my wife to make sure her investment objectives were being met. He suggested one of USAA’s target date mutual funds. I asked him why go with USAA when Vanguard and Fidelity’s have lower expense ratios. He didn’t have good answer for that other than USAA was charging a substantial fee (if memory serves) to get into those mutual funds. Long story short, we went some Vanguard ETFs based around index funds that had low commissions. This do-it-yourself wasn’t exactly what I was looking for, but it was the best use of money.

When I saw Jeff Rose’s article about hating target date mutual funds, I expected to read about how the funds have two sets of fees. There are the fees that the individual funds have, and the fees for managing/re-balancing the portfolio of mutual funds. He did get to that, but he uncovered something else. Some of the mutual funds included in these target date funds are, in his words, “just plum horrible.” (Side Note: Kudos to him for the use of plum as an adjective.)

Rose gives some examples of target date funds in some of his clients’ 401k plans and shows with back-testing that he could have made the client more than 3.5% with other choices in the 401k plan. Using the magic of compound interest Rose shows that in 20 years, that difference could be $295,000. Yep, that’s number is not a typo. We should all hate target date mutual funds right?

Maybe not so fast…

Here are a couple of thoughts that I had that may change your mind:

In 401k plans, there are limited investing options. Perhaps the target date mutual fund option in these clients had bad stocks, but I think it is a stretch to say that they are ALL bad. Outside of a 401k plan you may find a good target date mutual fund.
The 3.5% increase in returns in the examples are based on back testing a portfolio over the last ten years. Hindsight is 20/20. It’s easy to say that you should been in Legg Mason Value Trust when Bill Miller was beating the S&P 500 year after year… until it got decimated in 2008 (even in comparison to the market). Haven’t we read that past performance is not indicative of future results?

In the end, I realized that Rose’s views are different than mine. He’s into actively managing funds. I used to be that way, but I’ve settled into the low-expense index ratio camp. I haven’t been able to find that active advisor who is going to guarantee me that they’ll beat a broad index by 3.5% year after year, so stick with what I can control and that’s the fees.