Money Basics

I believe the use of debt is one of the great mysteries of our time.

Now I am sure that anyone that reads the first line will say that debt is not a great mystery; it is a very basic concept. Someone wishes to buy an item and they do not have the cash available, so they borrow from someone that does have extra cash. For this privilege, the borrower pays interest on the amount borrowed. Simple, you can look it up in any economics book without any difficulty.

But, I must ask some additionally simple questions. How many borrowers actually know the final cost once interest is added into the total purchase price? Just ask yourself, do you know how much the total cost of your home, or car or education is when, if any, borrowing costs are added to the total purchase price? Have you ever heard someone answer the question of how much something costs by stating that the basic price was $100 and with interest $120? So, mystery number one is why don’t people state the total cost of items purchased?

Maybe the next question is somewhat related to the previous one. Why are we not asking our elected representatives, yes, they are supposed to represent us, how much all of the debt used to support the government costs us, the people who eventually pay the debt? It actually is a staggering number when measured in relationship to our earning power as individuals.

Collectively, American’s earn approximately $13 trillion in total income after tax. This is the total amount of money coming into all of us for the services we perform. In the 1990’s, American’s had accumulated personal debt of about 85% of total income. Not on an individual basis but, all of us together. Some people had more debt than others, but in total, we carried about 85% of our total income in total debt. Interestingly, the entire debt load could be paid off with less than one year’s income, if we all pitched in together. During the early years of 2000 American’s, and our banks, were strongly encouraged by the government to expand home ownership. Banks were strongly encouraged by the Congressional Banking Committee to provide easier money to all American’s so that home ownership would become a reality. (The banks were accused of being stingy.) It worked. Soon thereafter home ownership increased but, unfortunately total debt increased sharply to where it reached 130% of total after tax income by the third quarter of 2007. Then the cost of this debt expansion came home. We all know what happened as the correction occurred and The Great Recession took hold.

American’s learned a valuable lesson and have now reduced total debt to 114% of total after tax income. That is a 16 percentage point improvement. This is no easy task considering that unemployment is above 9%. Remember, when debt rose to 130% unemployment was at 3%. Debt is continuing to come down as American households have reduced debt for ten consecutive quarters. We are doing the right thing to repair our personal finances. Congratulations Americans. Keep up the good work.

What is happening in the nation’s capital and many states? Debt is increasing. Debate is taking place about whether or not to increase the debt ceiling so the federal government can borrow even more money. Today, the federal government is in debt by $12.1 trillion. That is 93% of the entire incoming producing capability of all Americans and they want more. While Americans are trying to improve their finances, the government is taking away any improvement gained.

I find it interesting that if an individual attempts to borrow too much money eventually the lending institution, such as a bank, runs into guidelines that says that’s enough, no more credit. It is a good check and balance system to prevent over borrowing. When the government wishes to borrow more money, they just increase their own lending limit and then tell us to pay. Where is the check and balance?

I think we need to ask a final question. Since individuals in America, as a group, are finding ways to improve balance sheets and finances, why can’t the government find the means to do the same without continually just asking us to pay more?

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One week ago the debate about Japan was centered on whether the country would be a full time participant in exceptional growth surrounding the Pacific, or whether it would be left behind. Now, the discussion is focused on how much impact the changes in the last seven days will make on global economic growth. What a difference one week appears to have made in people’s expectations.

It is hard to imagine if anyone would have envisioned Japan would suffer an 8.9 earthquake, one of the most severe in recent history. Then, it would be hit with a tsunami that would bury many parts of the country with water. The combination of earthquake and water would continue to manifest itself into a nuclear problem that would leave a series of four power plants with multiple failures, and reliance on a last ditch effort in backup procedures. Submerged diesel backup engines left the power plants without the most necessary of items in nuclear power generation – cooling water.

Nuclear accidents spread a different type of fear into the hearts of everyone that is not the same as when a coal burning or gas fired power plant runs into trouble. There are the unknowns of radiation and the possibility of international impact through radiation clouds and gas releases. One atomic bomb survivor described it well when she said, “Most disasters are immediate, and the pain is quick, radiation suffering lasts a life time.”

I have not been asked about my opinion on the engineering of the power plant, nor the medical impact of radiation gas release, but I have been asked about the impact such a disaster can have on the economy and financial markets. The immediate reaction from investors was concern of global growth and many sought protection of recent gains and security from the unknown. Global markets sold off in the first few days with Japan receiving the largest hit. After that the emotional reaction is finished investors need to look at the facts.

First, the earthquake, tsunami, nuclear accident combination did not wipe out the country. While the damage is sizable, it did not stop the country from functioning. Tokyo, just 175 miles away from the Tokyo Electric complex where the nuclear reactors are located, is functioning well and with few of the normal crows. Downtown looks more like a London or New York City on Saturday morning. Most of the country is operating normally.

In normal markets, Japan represents 5% of the purchasing power of the world. Even if the entire country were not functioning, global economic activity would not be crippled. It would be negatively impacted, but I would suggest that the rest of the world would pick up the manufacturing and development. But, we are not dealing with a complete shutdown; it is a partial stoppage in the area of maybe 1% or 2% of global purchasing. Buying power of the country for foreign products and services will be temporarily impacted. However, the re-build is expected to reach $200 billion which will create higher demand for products and services than the normal economic activity and may even create global shortages for certain products.

Second, the economic recovery of recent has been occurring on a global basis and has positively impacted every major and developing market in the world. The U.S. market alone grew at more than 20% in the last 12 months and was headed in an upward direction that would become overvalued most likely by year end. At the time of the triple disaster, the largecap market was 13% above fair value. It was still trading in a fair value range, but at the top end of the range.

It is not surprising to see downward pressure on stock prices as a reaction to the unknown conditions in Japan. Even with the downward pressure the market has moved to a reasonable 5% over fair value, again still within the fair value trading ban.

I do not see the Japan situation developing into a widespread economic contraction similar to the mortgage crisis where the U.S. market was trading at a 40% discount from fair value. The mortgage crises impacted financial institutions across the globe because all enterprises and nations had invested in real estate and the supporting financial leveraging. There was good reason for the world’s markets to retrench; real values were in question. This situation is not global and is localized to one part of the island of Japan that in total represents 5% of the purchasing power of the world.

The one global factor that may come of all of the problems in Japan may be the impact on nuclear power and energy prices. We will explore that impact in a later writing.

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This week Google made the announcement that Eric Schmidt would no longer be steering the company through the next decade. This is interesting timing as the company faces numerous challenges from competition, regulators, talent grabs and continuing product development. Starting this week one of the original founders, Larry Page will take over.  Mr. Schmidt has moved over to become Executive Chairman and Mr. Page has come forward with his vision for the future and told us that, “My goal is to run Google at the pace and with the soul and passion of a startup.”

When thinking of a startup I am reminded of the original creation of Google, first known as BackRub, a little over a decade ago by two bright college students that were creative enough to gain the interest of venture capitalists. At that time Mr. Page held the title of CEO. At the recommendation of the investors, Mr. Schmidt was encouraged to join Google and leave a highly successful career at Novell where he was CEO. Mr. Schmidt was not new to the management of high technology. Prior to Novell, he was on the development of Java at Sun Microsystems and earlier at AT&T Bell Labs and XEROX.   The man arrived with a wealth of valuable management experience.  Under his guidance Google grew from small beginnings to more than $200 billion in annual revenues with 29,000 employees across the world.

The growth has not come without problems that are familiar to successful global enterprises. Competitors have encouraged key employees to depart and join a newer refreshing organization that can offer greater challenges, or a host on any other reasons that are used to get people to leave their current employer.  Regulators are giving Google increased scrutiny and challenging the company to be careful of restricting competition. The company, and executives, are of more interest to the markets where public statements are carefully, annoyingly examined.

Several years ago the famous squabble between the founders, Page and Brin, reached the news when they argued over the size of king sized beds aboard their personal 767. Reports circulated of meetings with the designer that took all day over the comfort of an on-board sofa because the two founders would not attend the discussions for more than five or ten minutes at a time, leaving the designers and others waiting.

The change in management has been designed to streamline decision making. The three individuals, Schmidt, Brin and Page , combined, own controlling interest in the company and can make any decision they wish at any time, as long as they agree. I am puzzled as to how decision making could become any more streamlined than that, other than at the exclusion of key individuals or groups within the company that are needed to implement decisions, and appreciate involvement. A $200 billion plus, 29,000 global employee enterprise cannot be dictated. Leadership is needed that considers the future of the customers, employees, shareholders, and even the competition when anti-trust concerns are knocking on the door.  Managing with the enthusiasm of a startup is fine, just remember, Google isn’t one anymore.

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I wondered about this so I went looking for some numbers.  Much of what is available has been developed by people who are attempting to come up with a large number and then they stop because the mission has been accomplished from their perspective. They have a large number and this will impress or shock people. As usual, with most items such as this, the real number is something quite a bit different. So as not to argue about the original numbers, let’s use the $1 million per inch that has been used in numerous reports when the “big storm” hits.

This number is a collection of various assumptions that seem reasonable on the surface. There is no doubt a large cost associated with the substances used to remove or prevent ice and slush. Sometimes it is sand, salt or a sand / salt mixture. It is expensive and has a limited use. Then there are the snow plows and the people that are hired to drive the plows day and night. (We will not include the necessary coffee and snacks consumed.) You must also add in the security services of the local police and state troopers. Then there is the lost time from shopping and work.  When all of this is included the number usually comes in around $1 million per inch.

Now let’s see where some of that cost might not be exactly right. First, much of what has been purchased in the way of consumables and equipment are not variable costs but are purchased well ahead of the storm and a fixed cost. If you are buying a snow plow the price is the same whether you are removing 1 inch or 10 inches. And the use of salt and sand is purchased ahead of time and is not directly related to the amount of snow that falls but is driven more by the makeup of the snow or ice.  One inch of ice can be more difficult to remove and require more material than 10 inches of light dry snow. It also depends how often the snow plows come by to remove the snow. If it cost $1 million to remove 1 inch of snow it might only cost $1 million to remove 3 inches as well.

Now let’s think about all of the people that are paid to remove the snow and provide additional security. When someone is paid money they generally spend the majority of the earnings later on things they need or want. The money that is paid to the people is not lost but placed back into the economy. In general, a dollar spent in the local community stays in circulation within the local community through four cycles, on average, before it leaves. In reality, the money paid to snow service related activities helps boost the local economy. It does cost the local and state governments money to pay the individuals but then the governments benefit from tax revenue and economic benefit when the money is spent.

What about the lost productivity and lost spending that people attempt to add to the numbers? If you were about to buy groceries or a gift for someone and you heard about the snow storm, would you not buy the groceries ahead of the storm? Would you not also buy the gift ahead of, or after the storm cleared? I know of many areas that celebrate when the snow storm comes because people will be skiing and riding snow mobiles. Why is that revenue not added back into the cost of a snow storm? If someone cannot get to the office the lost productivity is many times added-in to the cost of the storm. However, in reality many people can continue to work remotely at home. Production in a factory is not cancelled but gets rescheduled for a later date or reassigned to a different location. The production is not actually lost.

Too many times the costs of activities are taken as if time stood still at that moment and no one could plan or adjust. That is not the case in a snow storm.  Maybe we should celebrate the snow and enjoy the unique covering and the enjoyment it can bring. If we enjoyed the snow, maybe the cost of medical expenses would drop because people are happier rather than being depressed.

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Productivity is a simple concept; you produce more products or services with the same amount, or less of a resource. If you are a company producing a product and you are able to get more from the same amount of material or labor resulting in more revenue and profit. How could this be a bad thing? I guess it would depend on how you achieved the result of getting more production out of the material or labor.

If you worked the machinery more hours and kept the machines in top condition, made repairs and upgraded the parts that should be kept current, the increased production would be well earned. However, if you ran the machines until the parts were beyond used up, the oil was beyond changing and the machine was unsafe, you would consider the machines abused and the manufacturer short sighted. The increased production was short term and coming at a long term expense.

There are only two components of production: capital and labor. Capital can be used to buy machines such as the one described above. Money spent on labor is no different than the capital (money) spent on machines. If you ask employees to work longer hours due to all sorts of reasons such as an unusually high number of new orders, you should make sure you pay them accordingly. Or, increases in productivity might be possible due to increased training to improve people’s skills or knowledge.  The idea is that if you gain productivity by respecting employees, the increases in productivity are then well earned. Asking employees to work without some increase in compensation is not appropriate and would be considered abusive.  Asking employees to work without some increase in compensation is not appropriate and would be considered abusive. Just as in machinery, if the gain in productivity is through the abuse of employees, the gain is short lived and not good for the long term.

These concepts are clear and accepted by most people in the workforce. How does productivity then become so misunderstood and considered evil by the mere mentioning of the word?  It is because of the misconception of how productivity, employment, unemployment and profit all are inter-related.

During economic downturns companies need to reduce costs to offset lower revenues so that profits can be maintained and the business remains viable. An employer could fire the personal computer or the service truck, but that would not increase revenue or profits as the capital item has already been expensed. The only thing this action would accomplish would be even lower revenue further as the company now has less equipment to use.  The one item that can be reduced with an immediate impact is labor. This is not the best situation for the individual that is released, but it does mean the company can ask the other employees to increase productivity, hopefully temporarily, until economic conditions improve.

When economic conditions improve each company should take note of the improvements that were made during the tough times and use them going forward. This will result in increased profits that should be shared with the employees that made the increase in productivity possible.

Sounds simple; successful companies will do exactly that and reward the dedication of employees that have assisted the company through tough times. Eventually, the success will begin to strain even the most productive company and additional hiring will need to be considered to maintain the increase in production and expand revenues.

The recovery period is when most of the confusion increases between employee and employer. Most companies that have experienced economic downturns are reluctant to make new hires until there is some certainty in future growth. The employee is wondering how long increased production levels will be demanded. I am sure that most employers wait too long and ask more of the employees than they should. The balance between labor and capital is never perfectly matched and one side or the other is strained.

For the company that does manage the balance between labor and capital correctly, the effort should be rewarding in long term success and profits. The ones that mismanage the balance may gain in the short term, but in the long term will abuse one or the other and watch expenses increase, profits diminish and revenues decline. It may not be immediately noticeable and sometimes can take a long time to impact the company. However, in the end, the correct balance and management of productivity is rewarding for all. So, rather than concentrating on the ugly side of productivity which is abuse of capital and/or labor, we should also recognize the benefits of increased productivity that results in higher wages for a job well done and long term success.

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I am continually amazed at the numerous attempts by the investment community, politicians, scholars and media to make employment and unemployment conditions the means of scare tactics to the general population. Many times I have watched every one of the above mentioned groups attempt to explain how the economy is either headed for the gallows or into hyperinflation because of some change that occurred this month.

Anyone that has monitored employment or unemployment numbers in this country, or any other developed nation, knows that employment is a very long term indicator of economic wellbeing. It is not just a single number such as the unemployment rate, or new claims for unemployment benefits, but is a detailed analysis of the number of people employed in total as well as the portion in government, farming and private industry, along with the trends in unemployment claims, both new and continuing over time.

The idea that changes in one month can tell someone that the national economy, of any country or the globe is headed in any particular direction is wishful thinking. It takes several months of changes, both positive and negative, to determine the general, long term direction of a country’s employment and resulting economy. If one attempted to manage an investment portfolio based on the monthly changes of any employment related factor they would never be able to plan a long term investment strategy. Unless you are a Day Trader, remember them, your investment s should be designed to add value over the long term with specific investment objectives. Any attempt to manage the portfolio by reacting to day-to-day reporting of employment related factors would only end up with a whip-saw style of costly trading and poor performance.

Now that we know what not to do; what do we do and how do we use employment related data to help us manage a portfolio? First, realize employment, unemployment and related factors are long term factors and will assist, not perfectly predict, in determining long term trends in the economy. If unemployment rates are starting to increase, there is a good indication that the economy is already slowing. This only makes sense, as sales decline employers need fewer employees and unemployment rates begin to rise. Now one month does not make a trend, but if you see a continuing pattern of declines this will clearly indicate a slowing economy developing. This may be a trailing indicator as the economy may have been slowing for some time before employment slows. In many cases, an increase in the unemployment rate is a confirmation that the economy is slowing.  You would need to look at retail sales and if a decline was developing it would seem reasonable that unemployment would be next.

Just as in the decline, you can watch the trends to see if a recovery is in the making. Watch the rate at which unemployment increases; if it is increasing it will be a long time before the economy begins to recover as employers are most likely experiencing lower sales volume. If the rate of increase in unemployment starts to slow there is some promise that a recovery is in the making. (This is usually when the news is reporting the worst.)

You will also want to look at the total employment numbers. How many people are employed? Is it beginning to increase? This could be the beginning of a recovery. Watch where the employment is increasing; is it in the public sector or the private sector? Public sector increase may not be the best long term increase because it can be created by a government stimulus program designed to improve the economy and short lived. If private enterprises or farms are beginning to increase the number of people employed, it means they are more confident about the future and are increasing the number of employees working. This can be the beginning of the recovery and improvement in the economy.

You want to be able to determine, with some level of comfort that the economy is changing before the trend sets in, either improving or declining. Unemployment movements alone on a month to month basis are only going to confuse the investor. It may gain interest in discussion at parties or in social circles, but it will rarely benefit your investment decisions. Remember to look deeper than just the reported surface numbers.

In the next posting we will take a closer look at how related information such as productivity can also assist in determining where the economy is headed.

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The other day I was asked if I would invest money into General Motors (GM) if they come through with their plan to offer common stock to the general public. I thought about this in light of the material changes that have taken place in the American stock market and GM’s history.

 First, never before have companies, or the government, been so willing to use bankruptcy and receivership, as solutions to fix corporate problems resulting in common stock value demise.  What once was thought to be a last resort, something to be avoided at all cost, is now just another tool to recover from mistakes management has made in either financial controls or executing risky market expansion plans. The common stock holder needs to place greater emphasis on the long term view of a company and management, before investing valuable funds. GM does not score well on this front.

 Second, companies need to allow management to look long term and make necessary changes, so that they can implement a well thought out plan.  We need to define long term. From a management perspective that would normally be 5 years, and in some cases, even 10 years, depending upon the magnitude of the change required.

 GM has been making changes quickly since the government had to take an ownership stake in the company. Just a few days ago, Mark Reuss, GM North American President, said it was,” extremely clear” that a new management structure was needed. He has created a structure where sales, marketing and service are under separate leadership. Interestingly, just 3 months ago it was clear for the Chairman, Edward Whitacre, Jr. to fire then CEO, Fritz Henderson for having implemented the same plan just months earlier.

 Mr. Henderson had restructured to make things more efficient and effective just 9 months prior, but was fired in December 2009 and the Chairman, now CEO, Mr. Whitacre promoted Susan Docherty to the newly created position of VP Sales, Service and Marketing. The change was made to bring more efficient and effective decision making to the new GM.

 It appears that the most efficient decisions that have been taking place at GM are the amount of time a senior manager has in implementing change. With the last person only having 2 months before receiving the axe, I wonder how desperate the next VP of anything will be in making changes? This type of indecision and insecurity in managerial positions breeds desperate high risk actions.

 Should you invest in the new GM? If you enjoy extremely high risk positions, you might wish to look at Pakistani venture capital before taking on a company that has shown a repeated pattern of machine gun rapid fire shots, before determining where they are aiming, or what they are trying to hit.  The next rescue of GM will probably wipe out the shareholders. I don’t want to be one of them.

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This a topic that does not need to be complicated but, people who talk about it want to make it sound complicated for personal reasons that may include ego, purposeful misdirection, such as in politics, or a general lack of understanding themselves. Throughout history the discussion about subjects such as debt, inflation and currency have been confusing for the general public. This is unfortunate because they are very important to every citizen of every country. They are three of the most important factors in determining a nation’s financial well being. Not knowing more about them is equal to ignoring the importance of the interest rate on your credit card, or mortgage, or not caring how much money you have in a checking account to pay monthly bills. I don’t fault the individuals for not understanding how something like a strong dollar impacts almost every aspect of their lives; I fault the politicians. Why? Politicians are the elected representatives of our country and they are charged with the well being of the country and citizens. This responsibility does not restrict itself to simply providing citizens free services and assistance which appears to consume most of their time. It involves the well being of the country’s financial strength just as each individual is responsible for their own financial wellbeing.

Most of the confusion revolves around using catch phrases to make an emotional point without explaining the true factual meaning. How many times have you heard the expression, “We need a strong dollar in this country?” Well, that sounds good. Everyone should be strong. How can you argue against that? What if that strength ends up restricting growth? Let’s take the simple statement of strong dollar.

If the U.S. dollar is strong it means our currency is of higher value than the other countries. Keep in mind this does not necessarily win an award or a gold medal. However, it does mean that Americans can buy more of other countries products and services because the US$ is worth more than the other currency. We can order products on the web, enjoy foreign cars, travel abroad and enjoy beautiful hotels and dine in the better restaurants, even do some shopping for presents.  In reverse, that means the other countries cannot buy as much of American products because their currency is weaker.

Just as a simple example, let’s assume a fair and equal value is set at 1:1 there would be equal purchasing on both sides. But as the US$ increases in value, let’s say the ratio becomes 1:0.5. Now the American can buy twice as much as the foreigner. But, in return the foreigner can only buy ½ as much of American products. A trade imbalance results and America ends up with a trade deficit because more products are coming in the country than we are shipping out. Americans end up producing less. Not necessarily because the other country is doing something evil or unfair, it can be because the dollar is strong.

Now think about the political rhetoric you have heard in the past? How many times have you heard we need a strong dollar along with we need to stop American jobs from going overseas? Why don’t we hear about a balanced currency where economic growth is in line with the currency value? It is more difficult to discuss and manage. Let’s face it; no one rallied a crowd by encouraging balanced global growth through fair currency practices.

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When money is invested people expect to pay some sort of fee. It may be a management fee or a transaction fee or even a regulatory fee such as those that go to the Securities & Exchange Commission. No one really expects to conduct trades and be part of this activity without paying something. What people think they pay and the amount they actually pay are many times not the same.

This should be surprising because the investment industry is one of the most regulated activities in America. Now, we are not talking about the scams such as those concocted by the likes of Bernie Madoff. Those are clear and simple illusions. What we are talking about here are the fees that most people pay as part of the investment process but, they are unaware that the fee is even part of their investment.

Let us first look at the normal fees that people pay when they invest their money. We will divide the discussion on fees into several levels.
1. Level One – directly paid to a manager for conducting decision making on behalf of the client.
2. Level Two – transaction based charges that are a direct result of the activity of the investment decision making.
3. Level Three – administrative or regulator charges that are incurred and paid indirectly through additional itemized charges or as part of the investment that may get calculated in the cost of the trade or absorbed in a spread.
4. Level Four – incentive type payments that are made by any of the enterprises that are involved in the transaction.

Almost everyone is aware of Level One fees. These have been described as management fees or activity fees. A management fee is generally determined as a percentage of the total amount of assets in the account or value of the account. For example, if someone had $100,000 in an investment account and the manager charged 100 basis points (100 basis points = 1.00%), the annual fee would be $1,000. The fee is usually collected monthly so the client sees $83.33 collected each month from their account value. The philosophy is that the manager is incented to increase the value of the account through excellent investment decisions and thereby collects a higher fee since the fee is based on a percentage of the value of the account. The client and manager have similar beneficial interests.

A second type of Level One fee is charged to enter the investment opportunity, such as buying a mutual fund. These are referred to as up front loads, 12b-1 fees or marketing fees. These are disclosed to a client in a manner whereby they should be clearly aware that they are paying a percentage of the total value of the initial investment as an entry fee. Using the example from above, if the initial investment was $100,000 and the upfront load was 1%, you would pay the $1,000 in the beginning. All subsequent additions to the account and reinvestments of interest or dividends would also be charged the 1% entry fee. The philosophy with this approach is that you are rewarding the manager for making valuable recommendations.

Both types of Level One payments have their advocates. The biggest misconception is the entry fee activity is that the account is “free” unless trades are transacted. Sometimes the upfront load is not described clearly and the amount of the charge is also not declared clearly. Many upfront fees are in the 3% to 5% level. You need to be careful when the upfront charge is in excess of 2% because this is a significant amount of value deducted from the investment account in the beginning. In essence, the investor is immediately an extra 1% to 4% (upfront fee – management fee of 1% = disadvantage) behind from the start and this is compounded throughout the investment period of 10 or 20 years. That initial money never gets invested, at least not in the clients account.
Level Two fees are directly associated with the transactions themselves. This is different than the upfront loads we identified in Level One. The transaction fees we are focusing on at this level are items such as ticket charges and per share transaction charges. Each time you or your financial representative conducts a trade there is usually a ticket charge. This is the fee for processing the trade ticket in the system. It can range from a few dollars to maybe as high as $50 but, usually around $25. You need to know that each stock you trade creates a ticket. If you were to sell 100 shares of IBM and 100 shares of Exxon and 50 shares of Pfizer at the same time, you still would be creating three tickets.
Then there is a per share charge of a much smaller level which is usually between 5¢ to 10¢, depending on the complexity of the trade. Some international trades can reach $2.00 or more.

A Level Three fee is a regulatory fee or SEC fee which is so small it is rarely reported or mentioned on a statement but, usually is associated with the number of shares in the transaction.

Level Four fees are where it becomes more interesting. These have also been called “shelf space” fees. This is different than the upfront load or 12b-1 fee which is a marketing fee paid by the fund to the broker. The fee we are referring to in Level Four is usually disclosed in the Statement of Additional Information or Prospectus. Never heard of a Statement of Additional Information? Don’t feel bad; most people never have even seen one. This is where more details are disclosed about the funds that were generalized about in the marketing material.

There is a section in the disclosures where the fund tells about the fact they may pay investment advisors or brokers to recommend their products. It is usually titled, “Payments to Financial Intermediaries”. The payment is a direct distribution from the fund to the advisor or affiliate of the fund for placing the fund on the advisors “preferred list”. Some funds call this “revenue sharing”. Sometimes it is not just money but also includes “promotional incentives” that “could be significant and may cause a conflict of interest”.

When you evaluate an advisor or fund, make sure you understand all of the fees and how they are calculated. After all, it is your money.

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