Suze Orman Money Matters

For all the hullabaloo about the move to online banking, one of the biggest trends among banks is the increasing popularity of good old branches -- what's known as "bricks and mortar" in the industry.

There are now more than 91,000 bank branches operated by FDIC-backed banks, according to the most recent data from the Federal Deposit Insurance Corp. That's 10,000 more branches than a decade earlier. And Washington Mutual has plans to add 200 more "stores" this year, while Citicorp has about 100 more on tap.

But accompanying this trend is something that may result in consumers making costly mistakes. At the same time as more branches are spring up -- and this is no small coincidence -- banks were given permission to be more than just places where we all sock our savings and have a checking account. Beginning in the 1980s and gathering steam throughout the 1990s, banks were allowed to sell other financial products, such as mutual funds.

Pitfalls in the Branches

It didn't take long for banks to figure out that there's a lot more to be made from selling a mutual fund with a 5 percent sales load, than offering you an interest-free checking account. And they've learned that one of the best ways to sell those products is to operate like an old-fashioned retail store -- when it comes to making money decisions, it turns out that we prefer bricks and mortar over the computer mouse.

The retail-ization of our banking experience is what has set off such a firestorm over Wal-Mart's recent push to enter banking. Wal-Mart professes that it has no designs on becoming a full-fledged consumer bank. It says it merely wants to be able to handle its own credit-card processing -- but the banking world isn't buying it.

If banking's future is the ability to sell products like any retailer, the old-line banks figure that one of the biggest and best retailers in the world is eventually looking for a piece of the banking pie.

While federal regulators mull over the Wal-Mart situation, I'm more concerned about what's happening right now in those 90,000-plus bank branches. If you're not careful you could make a huge -- and hugely expensive -- mistake.

It Looks Like a Bank, But...

There's a pretty simple reason why we trust banks with our money. We have the assurance that our money is not at risk. Banks that belong to the FDIC give all of us an insurance policy on our deposits: Even if our bank goes belly up, the FDIC would make good on our deposits. The FDIC, an independent federal agency, is itself backed by the full faith and credit of the U.S. government. There's no better insurance policy than that.

But you need to understand some important rules: Generally, you have full FDIC protection for up to $100,000 in assets deposited at a single bank. If you have a self-directed retirement account (such as an IRA, rollover 401(k) or Keogh) at a bank, a new rule that kicked into action on April 1 extends your protection to $250,000.

But there's a big difference between a bank deposit and any other type of investment you may happen to make while sitting in the bank's store, er, branch. FDIC insurance is for pure bank products, such as your savings and checking accounts, as well as certificates of deposit and money-market deposit accounts.

A mutual fund, or other product you might just happen to purchase while inside the bank, doesn't have one penny of insurance. If your local bank sells you a high-flying technology fund that drops 20 percent in value over the next six months, the FDIC has no responsibility to make good on your loss. Mutual funds are not protected by the FDIC. They're investments, not bank deposits. Big difference.

While banks insist they do everything to make this clear -- they slap disclaimers in their marketing material and often have you sign something stating you understand this -- I know that plenty of people aren't getting it. They think -- wrongly -- that just because they invest through a bank, the financial institution will protect that investment.

The Bite of Fees

But it gets potentially worse. Chances are good that the mutual funds your friendly local banker is eager to sell you are a bad deal. When it comes to fund investing, you need to focus on the expenses you'll pay to buy the fund and the ongoing expenses you'll pay while you own it.

As far as I'm concerned, you should never pay a sales commission to buy fund shares. Check the name of a fund: If it has an "A" after the name or refers to "A shares," that means you'll pay a front-end sales load when buying the shares. A 5 percent load is typical.

That means that for every $1,000 you invest, $50 goes to pay a sales commission, leaving you with just $950 to invest. So in an A-share fund, you have to earn returns of 5.3 percent just to break even.

Even worse are funds that charge a deferred sales load. Any fund with a B or "B shares" in its name is trouble. The person selling you this fund may refer to it as a no load and explain that 100 percent of your money will be invested -- there's no money taken away to cover a sales commission.

Technically that's true, but it's also deceptive. What's important is what you'll pay when you sell your shares, as well as what you'll shell out during the time you own them.

An Expensive Deal

First, let's deal with the sell issue: B-share funds tend to hit you with a sales charge if you try and leave within the first five or so years you own them. If you leave within one year, you might pay a 5 percent load, if you leave in the second year, it could be 4 percent; in the third year, 3 percent etc. After five or six years you wouldn't have to pay a deferred sales charge.

If you intend on staying invested that long, you won't have a sales charge. But B-share funds still remain unattractive because you'll most likely have an incredibly expensive annual charge.

All mutual funds charge an annual fee that's known as an expense ratio. It's easy to miss this charge since it doesn't show up on statements as a separate line item. It's simply deducted from fund assets each year. You don't see it, but the return of your investment includes a deduction for your share of expenses.

Stock mutual funds tend to have expense ratios of about 1.5 percent. That means if a fund manager generates a gross return of 10 percent, the actual return a shareholder will pocket is 8.5 percent, after the 1.5 percent is deducted for expenses.

I'm a fan of index mutual funds -- especially for anyone who finds investing confusing -- because their expense ratios can be as small as 0.1 or 0.2 percent a year.

I know it looks like small potatoes, but take a look at this example: You invest $10,000, and the manager earns a gross annual return of 8 percent a year for 20 years. But you pay a 1.5 percent annual expense ratio every year. My index fund has the same 8 percent annualized gain, but I only have to pay 0.2 percent a year for the expense ratio. At the end of 20 years, your account is worth $35,236. Mine is worth $44,913. I could buy a lot more small potatoes than you.

The Stealth Sales Commission

And that brings me to my other problem with B-share mutual funds: They don't charge you an initial sales load, but you're still paying a commission. It just happens to be in the form of a large expense ratio. The person selling you the fund is just hoping you won't notice it. The expense ratio on B-share stock funds are typically more than 1.5 percent -- some are as high as 2 percent.

If you really want to understand the technical stuff, what's happening is that within your expense ratio is a special line-item charge called the 12b-1 fee. This is the money that goes to pay the person who sells you the fund -- the stealth sales commission.

To be fair, some B-share funds now offer a decent deal: After an initial period -- typically the number of years your deferred sales charge would be levied -- your B shares convert to A shares, meaning you'll have a lower expense ratio. But for at least the first five years or so, you'll be stuck paying the higher expense ratio on the B shares.

And even if you do eventually convert to the A shares, check what the expense ratio is. Unless it's less than 1 percent, I'm not a big fan. Remember, plenty of index mutual funds charge less than 0.2 percent. That's the sort of investment you want to bank on.