Is Growth Returning?

The third quarter GDP (Gross Domestic Product) report was released today and it showed an increase of 3.5 percent. This means that the total value of all goods and services produced in the United States from July to September grew 3.5 percent from the prior quarter. This quarter of growth follows four consecutive quarters of decreases and officially marks the end of the current recession.

Is this all good news? The answer can be "Yes" or "No," depending on how you interpret the news and who you are talking to. It is a good thing to see some growth in the American economy again. We all benefit from growth and progress in our economy and standard of living. One caveat though, is that the American GDP is still 10 percent below where it was at its peak in 2008. The unemployment rate also stands at 9.8 percent, which is the highest it has been since the early 1980s.

Many corporations have shown earnings growth recently, but much of this is due to cost cutting as opposed to revenue growth. Much of the GDP growth was also due to consumers purchasing automobiles, many encouraged by the "Cash for Clunkers" program. Government spending in general has also been higher than normal recently.

An ideal situation is an economy experiencing fairly consistent, sustainable growth with low unemployment. The American economy has experienced this situation in the past and should again in the future, but much government intervention needs to be reduced and rolled back so the U.S. economy can stand on its own. American workers and consumers have the will and the desire to see our economy succeed. Our economy will move forward from a stronger base once a recessionary period is behind us. No one knows how the next few years will play out, but we are seeing more and more positive signs.

The Costs of Investing

Much has been said recently about a new sense of frugality in our economy. Down markets and higher levels of unemployment have a nasty way of forcing people to be more frugal. Whether this frugality continues is yet to be determined, but one thing is certain--consumers are more price conscious in today's environment.

So what is the price of investing? When I say price, I'm referring to the transactional or management cost of investments. The risk associated with stocks and bonds and the potential cost due to realized losses is another topic and a separate discussion. There can also be tax costs associated with investments which I won't address in this post.

The do-it-yourself investor will need to set up an online trading account and will typically pay a trading commission of $8-20 each time they buy or sell a stock. There might also be an annual maintenance fee. Mutual fund trades can have transaction fees, or might be "no-load," which means there isn't an initial cost to purchase the shares of the fund. Mutual funds also have ongoing management and trading costs, which can be quite significant. These costs are disclosed, but not easily obtainable or comparable for the individual investor. Mutual funds can also have front end (purchase) or back end (sales) charges.

The investor working with a professional financial advisor will typically pay on a transaction or ongoing management basis. Some advisors will also consult on an hourly basis. The transaction cost is often a commission or front end charge that is passed on to the advisor. Mutual fund management fees are also shared with advisors at times and surrender charges cost the investor for selling out of an investment before a specified period of time has passed. An ongoing management fee is typically charged based on the value of an investment portfolio.

The myriad of costs, fees, loads and commissions are often complex, confusing, and at times, unnecessary. They tend to enrich the advisor at the cost of the client or investor. Although any professional investment advisor needs to be compensated to make a living, I recommend three things to keep in mind with regard to investment costs.

1) Costs should be fully and completely disclosed. Financial advisors are more likely to hide their fees if they are unnecessary or unreasonable.

2) Costs should not be charged at multiple layers, if possible. Investing can be done in an efficient, institutional manner where costs aren't charged at many layers without any corresponding benefit.

3) The financial advisor's compensation should be fully aligned with the client's best interest. An advisor shouldn't be paid solely for a "sale" without any ongoing accountability for client success and service. Commission-based salespeople are motivated to convince you that their solution is the best because that is how they are paid.

Investing significant financial assets in an appropriate manner can be critical to a prosperous and flexible financial future, but careful attention should be given to the price of investing before moving forward with an approach.