It would probably upset you to find that your retirement savings were down by thousands. However, many people unknowingly lose large sums of money from their retirement accounts because they are so costly and inefficient in executing transactions.
Every investment transaction you make is affected by how it is executed. Transaction fees and commissions have been reduced to virtually zero, but how companies execute transactions makes a difference.
Trading inefficiencies arise when firms do not take a thoughtful approach to trade execution. These inefficiencies are usually very small, equivalent to pennies per share. However, they quickly add up. If your mutual fund trades millions of shares, those pennies can be a significant amount! Over years of trading, they can deduct significantly from your retirement savings .
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How trades are cleared
Trading is done through clearing firms that specialize in facilitating the buying and selling of investments, also known as trading orders. When you buy an investment, you get a so-called “ask price”. When you sell, you get a “Bid Price”. The difference between these two prices, usually very small, is called a spread and is one way clearing houses make money.
Some clearing companies are more expensive than others so the best way is to shop for the best prices. will be filled by the first offer regardless of how the price compares to other opportunities.
Know your advisor’s strategy
To rebalance your portfolio and achieve your target level of growth each year, you need to make a deal. The general idea is that if you buy a product and the product is good, you get a positive return. But how trades are done should also be viewed as a strategic tool to generate revenue.if you strategically When you buy a good product that gives you a positive return, Better Because trade inefficiencies don’t lose part of that profit.
The concept is similar to bargains in the non-financial world. Some people always buy from the same store without checking to see if other stores sell the same things cheaper. can make a lot of money.
It is important to understand how investment advisors process transactions. Some recognize that it is not just the soundness of investment decisions that contributes to a client’s returns, but how much it costs to buy or sell those investments. We have our own platform called UX Wealth Partners. (opens in new tab) Find the best available trading options for each trade ordered on behalf of a client. Only available to registered investment advisors (RIAs), but not all investment advisors use it.
It is almost impossible for an ordinary person to determine what inefficiencies exist in trading. Therefore, if you have an investment advisor, actively learn how your advisor approaches trading. is needed. Ask how the deal is done. Is it simply by regular orders to the big custodians who market the trades? Or is the focus not just on executing trades, but on ensuring clients get the best price for their trades? Are the trades regulated by the platform that placed them?
In short, do they think about pricing and trade systematically? When Trade execution?
Pennies turn into dollars over time
Most people spend decades saving for retirement. With such a long timeframe, even small inefficiencies can add up to a large amount of money. You can avoid losing thousands of dollars unnecessarily by making sure your investment advisor is shopping at the best price for executing trades.
Work with your financial advisor to ensure that all aspects of your strategy are considered.
This article was written by and represents the views of a contributing advisor, not Kiplinger’s editorial staff.Advisor records can be viewed with the SEC (opens in new tab) or at FINRA (opens in new tab).
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