Buying Stocks, Bonds Or Mutual Funds?

 Here are 4 Questions You Should Ask Upfront...

1) Can I see your Commission & Fee Schedule?
Bank.  Brokerage.  Or Financial Institution.  No matter how long you've dealt with them. Or how much you revere their name. You should ask to see their Commission & Fee Schedule. Before you venture out from checking,savings and CDs. Into the brave new world of stocks, bonds and mutual funds.

Let me repeat that.  Ask to see the Commission & Fee Schedule associated with their investment account. 

Here are all the gotchas that could be lurking there, if you don't.

• Commissions on Each Trade. Every time you buy or sell a stock, bond or other investment, you will pay a commission to make the trade. Since commissions vary - from $3 at Sogotrade to $7 at Scottrade to $9 at Etrade and TD Ameritrade, to upwards of that at Banks and other financial institutions, you want to know this in advance. So you can decide what you are comfortable with. Have a combined balance of $25,000 in all your accounts? Some banks like Wells Fargo and Bank of America will let you trade for free.  That's something you can look into as well. Either way, do your homework and find out about the commission structure ahead of time.

• Account Maintenance Fees.  Then there are Account Maintenance Fees.  Some institutions have this. Some don't. How to know?  The Fee Schedule should tell you.

• Inactivity Fees.  If your account is inactive - in other words, you do not buy or sell anything for a while, some will impose an inactivity fee. If you buy a few stocks and then sit on your hands, you can be slapped with this fee. You want to select a bank or brokerage that does not charge inactivity fees. Look at the Fee Schedule. See if it says that anywhere.

• Transfer Fees - If you want to close your account and move it to another bank or brokerage..., there's a charge for that as well.  Usually runs between $50 and $100.  Find out about it now.

2)  What are the expenses associated with this investment?
This refers to the investment itself.  Not the account.  For instance, mutual funds come in different flavors.  Managed mutual funds have higher expenses than indexed funds.  Load mutual funds will cost you more than no load mutual funds.  Ask about these costs and expenses.  You may decide you do not want to pay them.  Financial pundits like John Bogle & Warren Buffett recommend the average investor stick with indexed, no-load mutual funds for this reason.

3) What is the cost of getting out of this investment? 
I have already told you about the Transfer Fees you will incur if you want to move your account to another institution. In addition, depending on what kind of product you have bought into, you may have some hefty exit charges.  For instance, you should buy an annuity only after finding out what the surrender charges are in case you want to exit the annuity earlier than expected.  As a practice, you should ask about costs associated with getting out of every type of investment or account.  No matter what!

4) How do you get paid?
This is an uncomfortable question, but must be asked of the person you are dealing with at the bank, brokerage or financial institution.  Many financial advisers and sellers of insurance products such as annuities are paid entirely through commissions on sales.  So naturally they might be eager to sell you something that's not particularly in your interest.  This is why the the general recommendation is to deal with fee-only financial advisers. 

Asking these 4 questions before venturing into an investment account will save you money and heartache.  Write them down somewhere so you will have them when you need them.

Happy Investing in 2011.  May You Prosper & Thrive!