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Time to turn outrage over bank fees toward entire financial industry

Bank of America's now-scuttled $5-a-month debit card fee was peanuts compared with the management and marketing fees that many mutual fund investors are paying.

November 04, 2011|Tom Petruno | Market Beat
  • A protester is arrested during a sit-in in the lobby of the Bank of America branch at 7th and Figueroa streets in downtown Los Angeles as part of a demonstration against Wall Street and big banks Oct. 6.
A protester is arrested during a sit-in in the lobby of the Bank of America… (Genaro Molina, Los Angeles…)

Popular outrage forced Bank of America Corp. to drop the idea of a $5-a-month debit card fee.

Now imagine what that outrage could achieve if it were let loose across the financial industry.

How many mutual funds, if faced with that kind of people-power backlash, could justify the management and marketing fees they're charging investors?

How many banks would find their deposits running out the door if savers really took the time to shop around for the best rates?

How many company 401(k) retirement savings plans would offer better investment choices if workers took an active role in monitoring the plans and agitating for improvements?

None of this is easy — certainly not as easy as posting an angry comment on a blog trashing BofA.

But the potential savings or added income for investors, savers and borrowers could far exceed the $60 a year that BofA would have siphoned away with the debit card fee.

"Far too many consumers are sloppy with their finances," says Greg McBride, senior analyst at Bankrate.com.

And we aren't just talking about the poor or uneducated. Plenty of middle- to upper-income people could do a far better job with their money. You know who you are.

For investors and savers, one argument against bothering with trying to improve their lot is that returns are so puny it isn't worth the effort.

How about turning that around: Lower market returns make it even more imperative that you try to limit the money that banks, mutual funds and other financial-services providers try to hive off from you.

Where to start? Let's go from not very difficult and move up from there.

Bank savings. You aren't going to earn much in cash accounts no matter where you go, with the Federal Reserve holding its benchmark short-term interest rate near zero. Worse for savers, the Fed in August said it was likely to keep short-term rates at these levels for at least two more years.

Still, some financial institutions will treat your money far better than others.

Among the top 50 U.S. banks, the average annualized yield on money market deposit accounts — basic savings — is just 0.29%, according to Informa Research Services. But go to Bankrate.com and you'll see more than a dozen banks paying 0.80% or more.

For older people who keep significant sums in bank accounts to have the safety of federal deposit insurance, the difference between 0.80% and 0.29% can be substantial. On a $50,000 deposit, that's $400 in annual interest versus $145.

McBride has two tips for savers in this dismal environment. First, avoid the banking titans. "The biggest banks have the least competitive rates and are swimming in deposits," he said.

Second, look to credit unions if you can. (They are the intended beneficiaries of today's Bank Transfer Day, a movement to encourage Americans to abandon banks.)

It isn't a myth, McBride said, that credit unions tend to pay more on deposits than banks. Why? Because credit unions are not-for-profit organizations. But they offer exactly the same kind of federal deposit insurance as banks.

Money market mutual funds. The funds are major casualties of the Fed's near-zero rates. They can pay out only what they earn on short-term securities. Because they're earning practically nothing, they're paying practically nothing.

The average yield on money funds available to small investors is 0.01%. This could go on for two more years, if the Fed's projections are on target. And unlike bank deposits, money funds aren't federally insured.

The funds are a great place to be in times of rising interest rates, but for now they make no sense for cash. The exception: money that you might want to quickly deploy into stocks or other investments.

Stock and bond mutual funds. Americans have $9 trillion in conventional stock and bond funds. And probably very few know how much the funds are costing them every year in management fees and other expenses.

The discrepancies in the industry are vast. Here's an analogy: If you were buying a TV, you'd shop around, and you certainly would avoid a retailer who charged three or four times what other retailers charged for the same TV.

Yet some mutual funds charge three or four times in expenses what others charge for the same performance.

They get away with it because management fees are paid directly from fund portfolios (they're expressed as a percentage of fund assets). They reduce your return without you knowing it — unless you pay attention.

The fee differentials can be particularly egregious among index funds, such as those that just seek to replicate the Standard & Poor's 500 index. Vanguard Group's 500 Index fund has an annual expense ratio of 0.17%. Many of its rivals charge 0.60% or more.

That should be just as outrageous to investors as a $5-a-month debit card fee.

The fast rise of exchange-traded funds, or ETFs, in recent years shows that more investors are getting serious about paying lower fees. ETFs, most of which are index-tracking portfolios, tend to have very low expense ratios.

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