Is Your IRA Really Free? Regulators Are Looking Into It

Written by: Jack Boylan

Short answer: No. The longer answer is more like not really. But those annoying ads that you see touting “free” or “no-fee” IRAs are coming under scrutiny by the Financial Industry Regulatory Authority (better known as FINRA). And they seem to be getting to the heart of the problem:

“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.

Now, I would hope that the above sentence would be gob-smackingly obvious to everyone, but apparently that is not the case. And it is understandable how the uninitiated could be confused. Those aforementioned advertisements began as a way to combat the large brokerage firms, such as Merrill Lynch, that charged an annual “maintenance” fee just for the privilege of having your account with them. This was a ubiquitous practice pretty much everywhere not that long ago and advertising “free” IRAs was a way to cut through the clutter to get noticed. And it worked. Customers have always hated that fee and they signed up in such large numbers that almost all firms now offer “free” IRAs, albeit with minimum balance requirements at some of the large firms. In pure mathematical terms the annual maintenance fee may have been annoying, but it really was just that and it could have caused many people to miss the more important costs:

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.

Exactly. But hey, it’s completely understandable in that people just get annoyed at having to pay a fee while doing business with a company. As FINRA points out though, there are many fees associated with IRAs that get less notice. The example above is the primary one, of course. Those mutual funds in your portfolio are generating “management” fees every single year and more than cover the costs (in most cases) of sending you statements, notices, checks etc. There are other possible fees like any commissions paid to purchase your investments as well as deep-in-the-fine-print nuggets such as a penalty if you ever transfer your account to another firm. So it looks as if FINRA is getting serious about some of the fibs in the advertisements and there could be change coming soon.

That is all to the good, more or less, as the more information the better. But, it is important to note that fees are not the be all and end all for investors. I know that fee management is touted as paramount to the “serious” investor and it is hard to find any advice on CNBC and elsewhere that doesn’t harp incessantly on this topic. But for you novice or casual investors, please remember that it is far more important to have an IRA than to worry about the amount of fees you are paying. It is comparable to exercise. There are certain workouts that you can do that may be more efficient, effective and “serious” than what you are currently doing, but just the fact that you are exercising at all has you way ahead of the game. As you get to know the different workouts and how they fit in with what you are trying to achieve, you will naturally begin to gravitate towards those that accomplish your goals. The same parameters fit in with investing. Get the ball rolling with something and, over time, as you learn the ropes you may find yourself pulled toward different kinds of investments altogether. Don’t get me wrong, fees are a very important consideration, but not nearly as important as the actual investing itself. There are plenty of people at least partially living off their retirement accounts who, for years and years, paid Merrill, or Morgan Stanley or some other “expensive” full-service firm an annual maintenance fee as well as relatively high mutual fund fees and commissions on top of those fees. So how will this new regulatory interest in fees be of import to you? Well, unless you haven’t begun investing and may be looking at ads to see where to put your money, you probably won’t even notice anything different. It’s nice to know that FINRA is looking into possible misleading advertising, but for the average investor it will not really change a thing.


Is Your IRA Really Free? Regulators Are Looking...

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