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In his State of the Union address, President Biden announced his intent to “take on junk fees.” These are the hidden fees involved with many of the services we purchase. I have written previously about undisclosed fees related to investments (annuities, private REITS, partnerships, etc.). Hidden fees are also found in service industries such as airlines, restaurants, hotels, and utilities.
Why don’t sellers of services transparently list one price that includes all fees? The main motivation is psychological. Sellers often wants to attract customers by appearing to offer the lowest price, even when they charge the same as or even more than their competitors. One of the cognitive biases they use is anchoring.
For example, if one airline offers a fare at $600 and another offers the same routing for $450, our fast-acting “limbic brain” automatically anchors on the $600 fare and assumes the $450 is the better buy. It takes a shift to our slower thinking “cognitive brain” to grasp that the $600 fare may include all the services that are added as fees to the $450 fare.
A consumer who takes the time to read the details of the $450 fare may learn that early boarding costs $50, reserving a seat is $60, a window or aisle seat is $30, one checked bag is $50, and a carry-on bag is $30. These added fees total $220, which would bring the $450 fare to $670. That’s $70 more than the seemingly higher $600 fare.
Similarly, at first glance a $200 hotel room with no resort fee appears to be more expensive than a $160 hotel room with a hidden $50 resort fee. A $50 daily car rental fare with taxes included looks higher than a $40 daily rate with a hidden airport tax of $10 and additional taxes of $8.
Since the pandemic, I’ve also noticed a new 3.5% fee added to the check at some restaurants. It is not a tip, can be creatively given various names, and often is not mentioned prior to ordering.
These added fees are completely legal. Proponents of a menu of charges and fees argue that this gives consumers the option to only pay for the services they want. If the only add-on an air traveler needs is a carryon bag, then the $450 fare plus a $30 fee is the best deal.
The real issue here is not about offering consumers a menu of charges from which to choose. It is about transparency. Who can argue with requiring sellers of services to be held to a standard of transparency?
If you read the small print of Biden’s Junk Fee Prevention Act, you will see that it covers only four types of fees: online concert and sports fees, airline fees for families to sit together, undisclosed resort or destination fees at hotels, and early termination fees for TV, phone, and internet services.
That’s it. Writing a bill that encompasses the enormity of mandating transparency of all charges is next to impossible.
Junk fees will be with us for a long, long time. As with most financial purchases, the burden is on the consumer to get all the facts before agreeing to the service. A good way to end being played for a sucker is – before you buy – to ask, “What other fees or charges are there I need to know about?”
I also suggest following the timeless advice to “Read the fine print.” I love this quote (attributed to folk singer Pete Seeger, among others) about the difference between education and experience: “Education is what you get when you read the fine print; experience is what you get when you don’t.”
Rick Kahler, MS, CFP®, CFT-I™, CeFT®, CCIM, is founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.
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Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
