If you discovered your retirement savings were reduced by thousands of dollars, you’d probably be upset! But many people lose significant sums of money from their retirement accounts without realizing it because of overly expensive inefficiencies in the execution of trades.
Every investment trade you make is influenced by how it is executed. Although commissions and fees on trades have been effectively reduced to zero, the way firms execute your trades makes a difference.
Trade inefficiencies result when firms don’t take a thoughtful approach to trade execution. These inefficiencies are usually very small, amounting to pennies per share. However, they add up quickly. If your mutual fund trades millions of shares, those pennies can become a sizable amount of money! Over years of trading, they can significantly subtract from your retirement savings.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How Trades Are Cleared
Trades are conducted via clearing firms, which specialize in facilitating buying and selling investments, also known as trade orders. When you buy an investment, you get what’s called the “ask price.” When you sell it, you get the “bid price.” The difference between those two prices, usually very small, is called the spread and is one way clearing firms make money.
Some clearing firms are more expensive than others, so the best practice is to shop around for the best price. But many investment advisers don’t! They simply pick a trading custodian and create a trade order, which gets filled by the first offer regardless of how its price compares with other opportunities.
Know Your Adviser’s Strategy
Trading needs to happen in order to rebalance a portfolio and meet target levels of growth each year. The common notion is that if you buy a product and that product is good, you will get a positive return. But how the trade is done also needs to be viewed as a strategic tool to increase return. If you strategically buy a good product that results in a positive return, you will get a better return because you won’t lose some of that return through trade inefficiencies.
This concept is just like bargain-hunting in the non-finance world. Some people always buy from the same store without checking to see if another store sells the same thing for less money. If they shop around, they’ll have more money at the end of the day because they spent less on their shopping trip.
It’s important to understand how your investment adviser handles trades. Some recognize it’s not just the soundness of the investment decision-making that contributes to the client’s return, but also how much it costs to buy or sell those investments. There is a unique platform called UX Wealth Partners that finds the best available trade options for each trade ordered on behalf of clients. It’s available only to registered investment advisers (RIAs), but not all investment advisers use it.
It’s almost impossible for a regular person to determine what inefficiencies exist in trades. So if you have an investment adviser, you need to be proactive in learning how your adviser approaches trading. Ask how the trading is conducted: Is it being done via routine orders to a large custodian, which simply puts trades on the market? Or are trades orchestrated by a platform that is not only focused on executing those trades, but also on making sure clients are getting the best price for the trades?
In short, are they trading methodically, thinking about the pricing and the trade execution?
Over Time, Pennies Become Dollars
Most people spend decades saving for retirement. Over such a long timeframe, even small inefficiencies can add up to large sums of money. By making sure your investment adviser is shopping for the best prices for trade execution, you could avoid losing thousands of dollars unnecessarily.
Work with your financial adviser to make sure all aspects of your strategy are being considered.
-
Dow Adds 314 Points to Thanksgiving Rally: Stock Market TodayInvestors, traders and speculators enjoy the best Thanksgiving Week gains for the major stock market indexes in more than a decade.
-
Why Prepaying Your Retirement Dreams Might Be a Financial Game ChangerHe bought his retirement home more than a decade before he plans to retire. Was it the right move?
-
Unwrapping Your Estate Plan for Your Kids: A Gift That'll Keep Giving Long After the HolidaysThe holidays offer families a perfect opportunity to discuss important, often difficult topics like long-term care, estate plans and legacy.
-
5 Ways to Teach Your Kids About Giving Back, From a Financial PlannerTeaching kids generosity goes beyond simple rules and can involve fun, practical strategies, such as letting them lead giving, volunteering together and more.
-
I'm a Financial Planner: Here's How You Can Use AI to Improve Your FinancesApps can help with budgeting, saving and investing, financial coaching and debt management. But providing your personal information can also raise your risks.
-
When Checkout Charity Gets Uncomfortable — and Maybe Even IllegalCashiers asking customers to 'round up' their total for charity can cross an ethical line if there's no disclosure about the benefiting organization.
-
Four Ways to Find Free Money to Pay for College: Affluent Families Can Apply, TooFamilies can access scholarships, grants and incentives by strategically positioning their students in terms of merit, skills and timing.
-
3 Tax-Smart DAF Strategies Advisers Can Put to Work for Clients During Giving SeasonDonor-advised funds can help clients maximize their philanthropy through front-loading deductions, donating appreciated assets and 'bunching' contributions.
-
How Financial Advisers Can Turn Compliance Into a Competitive AdvantageCollaboration, transparency and education can strengthen compliance and empower financial advisers to thrive.
-
Holidays Are a Rich Time to Talk Money With Young Adults: A Financial Adviser's Guide for ParentsThe most productive family financial conversations start with open-ended questions and a lot of listening. Don't let this opportunity pass you by.
