The penalty economy’s objective is to guide people into paying more than they intend when they are confused, distracted or too busy to care. It’s not necessarily illegal or even unethical. Almost every industry has its version and it’s usually a very profitable business tactic. Have you been spending money in the penalty economy? If so, it’s time to increase your awareness and opt out for something better. Here are some examples:
Something for Nothing
No one intends to borrow money at a 22% annual credit card rate or pay $75 via a parking ticket when the metered rate is only $2. These are simple examples. Banks and airlines are champions in the penalty space. Your checking account is free, until you bounce checks at $40 a pop. Your airfare is $330 until you want to change your return date, for a mere $150 fee…
Penalties are usually fully disclosed, if you take the time and care to find and read the fine print. Few consumers do. Penalties are usually structured and deployed in ways that are unclear and unnoticed for most buyers. It usually feels like it is unnecessary or too much work to investigate further. When was the last time you asked a friend or advisor to double check your work or assumptions when buying a plane ticket, leasing a car, applying for a credit card or renting a vacation home? Young, undereducated, very busy or disorganized people are often the prime targets for penalties.
The penalty economy is alive and well in finance, too, of course. Commissions and fees get wrapped up and buried behind ambiguous line items on statements. Some investments, including many annuities, are specifically designed like lobster traps — easy to get in and very expensive to get out. In the mutual fund world, front end, load, 12b-1 and back end fees are common examples of disclosed fees that most buyers don’t notice, understand or investigate. Sometimes these fees are reasonable and fair, but more often they exist solely as penalties for those who don’t do enough research or due diligence. You can count on the industry to invent new fees when existing penalties become better known.
Our advice: Follow the money
Investment brokers who get paid on commission are often prompted to sell particular products to earn the commission. There are many unappetizing stories about this kind of incentive that penalizes the client. You’ve probably seen the term “Fiduciary Rule” in headlines over the past year. This rule protects investors by requiring investment firms to always work in the best interest of clients and to be completely transparent regarding fees and penalties.
Registered investment advisors, like Osbon Capital, are legally bound to the fiduciary standard. As fiduciaries we get paid only one fee for management and advice — by the client — and receive no fees for selling products. Not all firms are held to this standard. We strongly suggest you follow the money and find out if your financial provider is getting paid by anyone other than you. If so, you’re probably funding some of those payments via fine print penalties. If you’re not sure, we can help you figure it out.
Spend less than you make
Our most successful client families are the ones who work hard to make sure they spend less than they make – especially when it comes to penalties. One easy way to add certainty to your financial future is to simply lower your tolerance for penalties. Take the time to know what a mistake or careless purchase will cost you and educate those around you when you find something new. When you add all those savings to you and your loved one’s bottom line, you might be surprised by how much capital the penalty economy drives.
Max Osbon– mosbon@osboncapital.com
You might enjoy reading this article on Skeptical Investing because it also discusses fees.
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