One of my good friends is a financial planner. He recently told me something very interesting about hidden fees. He basically said that his income comes from the fees that he charges his clients. They are typically based on a percentage of the client’s assets. That means that every quarter (or annually), those fees are automatically taken out of his client’s accounts. Sure, they agreed to that when the investments were originally set-up. The flip side, apparently, is that his clients can technically for him for unlimited advice and support, if they needed it.
No Good Deed Goes Unpunished
After a while, he actually felt that he was charging his clients too much. He switched his fee model, opting to charge a set price per year — no matter how much money was being managed for any particular client. Instead, he also charged a small fee for every meeting the clients requested. He thought he was doing his clients a favor. After all, the average fees for his clients dropped by almost 40%. However, something interesting happened instead.
His clients, not wanting to pay an “extra” fee every time they wanted a meeting, started complaining. Even though they were now paying him less annually, they hated being charged for every in-person meeting or hour-long Zoom call. Some clients even got angry about the fees, even though the switch was designed to make my friend’s business less expensive than competitors.
My friend learned a big lesson. People are much less sensitive about fees if they are just kind of hidden and paid automatically. He eventually switched back to the straight percentage model. It’s what his clients were used to. There was simply no reason to anger his clients just to be paid 40% less.
Are You Like His Clients?
When you hear a story like this, it’s easy to laugh. It all seems so silly, right? I mean, one of his larger clients was getting angry about having to pay $500 for a personal meeting, when the change to the fee model was already saving him more than $50,000 a year. That client would need to schedule 100 meetings per year in order to end up paying more than he used to!
Then again, aren’t we all like that client in some way? Hidden fees are everywhere in our world. How many times do we pay attention to them? Even if we do, how often do we actually do something about it? Here are some commonplace hidden fees to be aware of (and a few tips on how to avoid them).
Foreign Currency Exchange Fees
One common example is the foreign exchange fees that overseas merchants charge if you pay in US currency. No, I’m not talking about the foreign transaction fee that can easily be avoided by using a card that doesn’t charge the extra fee. The conversion fee isn’t an extra line item that’s listed anywhere. However, if you look under the hood, you’ll see that they convert the local currency back to USD at a ridiculously bad exchange rate.
When you shop overseas, you always ask the retailer to charge you in their own local currency. That way, the charge is routed and the currency is converted at the VISA (or Mastercard or whatever) network at a fair exchange rate.
Escrow Closing Costs
Going through escrow is another period of time when many people are legally scammed. When I sold my last home, the escrow company tried to tack on a a bunch of mailing fees. Maybe that’s normal, except practically all the documents were sent and signed electronically due to the pandemic. The few forms I did have to sign in person, I drove to their office for an appointment. Nothing was mailed at all! Luckily, I noticed these charges and told them to remove them.
You also need to know that almost every escrow fee is negotiable — but only before you actually enter escrow. Once the escrow period commences, the company knows you are locked in with them. You’ll also be happy to know that while the seller usually dictates the escrow company to use, a buyer can always request to use one that saves everyone money. That’s why it’s best to do your homework. Shop for an escrow company before you make any real estate offers. You could be saving thousands of dollars in fees in a typical transaction.
Out of Network ATM Fees
It’s hard for me to imagine that people are still paying out of network ATM fees. Then again, my days of clubbing or bar-hopping are long behind me. Those places often have expensive ATMs that prey on people needing more cash to keep the night going strong. If you want to avoid out of network ATM fees, then simply have your cash ready before you actually need it. All it takes is a tiny bit of planning.
If you find yourself paying these fees often, no matter how much you plan, then consider changing something in your banking. Ask your bank if there’s a different account type you can use that will result in lower fees. If they don’t have an option that works, consider switching banks entirely. I know that Charles Schwab has an account that will reimburse all ATM fees charged by a third party. Take advantage!
Other Bank Fees
It’s not just the ATM fees, either. Overdraft fees, account maintenance fees, wire transfer fees — they all add up. The worst part is that you might not even know you’re being charged at the time. These fees usually show up a day or two after the transaction itself. That means if you’re not checking your bank history regularly, you can easily miss them.
The good news is that other institutions probably have a product that doesn’t charge the same fees. If you’re worried about account maintenance fees where you have to maintain a minimum balance, your current bank may even have another type of account that waives this minimum. You can easily move your current account into this less-expensive product. Lastly, you can always ask the bank to waive (or reimburse) any extra fees you incur. Did you forgot to leave enough in your checking account for that automatic car payment and get hit with a $50 NSF fee? Just ask for it back — politely, of course. They may say no (especially if you’re asking too often), but it never hurts to try.
Movie Ticket Convenience Fee
My wife went to the movies with her friends the other day. They each had to pay a $2 convenience fee so they could reserve seats ahead of time. After they had booked their seats, one more friend decided to join (and also paid the fee). However, if they had waited and all bought their tickets together, they would have saved those fees. This theater doesn’t charge the convenience fee if you book four (or more) tickets at once.
My friends and I go out to the movies often too. One of my friends always use Fandango to book everyone’s tickets and pay the fee. If I wanted to save, I could just get the ticket myself at the cinema’s own website. They charge a smaller convenience fee. However, it’s still much easier for my friend to buy them all together and then we pay him back with Venmo.
To be honest, we could just wait until we get to the theater and buy the tickets then. Most of the time, we are one of about twenty people sitting in a theater that houses 100 people. There are plenty of spots to choose from, even if we get the tickets very last minute.
Hidden Investment Fees
There are all sorts of fees that you pay with your investments. You really have to think hard about whether the fee you’re paying justifies the benefits. In some cases, you may not have a choice. For instance, there isn’t much you can do if your employer uses a 401(k) that charges an administration fee. Still, you certainly don’t want to be moving more of your IRA money into that 401(k) if the employer plan doesn’t offer good investment options.
As with anything about investing, don’t underestimate the power of simplicity. If you are unsure, opt for the simplest of investments. That’s usually low-cost index funds with a buy and hold strategy. At least you will get market returns without paying high taxes year in and year out.
Airline Baggage Fees
We recently once went to San Francisco for $50 a ticket. What a deal, right? The catch, though, was that we couldn’t bring any luggage onboard unless we want to pay $50 per bag — each way. We also noticed that the same San Francisco flight had a $100 ticket option, that includes one piece of luggage for free. So what did we do? We bought one ticket for $100 and then three tickets for $50 on two separate transactions. We packed light and put everything in one large suitcase.
Airlines are getting more and more clever about advertising seemingly cheap (but no-frills) tickets. If you don’t want to be surprised with hidden fees tacked on when you check in online (or even more at the ticket counter), then make sure you understand what you are getting into before you actually click purchase. You may be charged extra for checked baggage, picking your own seat, food and beverage, or even a carry-on bag.
Hotel Fees Up the Wazoo
Hotels are hurting – no doubt about it. The pandemic really did a number on the entire travel and tourism industry. That doesn’t mean you should just happily pay all their extra fees, though. Some hotels charge “resort fees,” plus extras for Wifi, bottles water, and anything else they think they can get away with.
The best way to avoid these hidden fees when you check out is to learn about them ahead of time. Sometimes it’s simply too late once you get to the hotel. For incidental charges like water, check to see if the hotel is close to a drug store or even a supermarket. I always just go to CVS or Walgreens and get a jug of water for $1 on the first day of my stay. That way, I get plenty of water and I won’t have to pay an arm and a leg.
Credit Card Convenience Fee
This isn’t so much a hidden fee, since merchants usually tell you clearly that you are being charged more to pay with your credit card. However, this fee is worth mentioning here because there are still people who are surprised to learn that a merchant will charge them extra for using a credit card. Not everyone does it, but it’s still an extra cost some places.
For those who already know about this fee, you might not know that it can still worth it to use the credit card and eat the convenience fee. I pay my property taxes with a credit card, even though they charge a 2.25% convenience fee. Why? It’s because I get 2.625% cash back whenever I use a credit card. So I come out slightly ahead. Plus, I get another 3o-to45 days to actually pay my credit card bill.
For those who are responsible enough to pay off their credit cards in full whenever the statement comes, do the math. This strategy can work for you.
The Bottom Line
All the solutions to avoiding hidden fees have a common thread. If you don’t want to get a surprise surcharge in the future, you would do well by learning about them and planning ahead.
Of course, it’s easier said than done. After all, merchants are smart. They will keep drumming up all kinds of ways to make a little more money from us all. Still, if you keep getting burned by the same fees and you don’t do anything about it, then it’s on you. As the old saying goes “fool me once, shame on you; fool me twice, shame on me.”