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No Fees - Scam or Real?

It doesn’t take a genius to understand that investments with lower fees will produce higher returns for the investor, all else being equal.  So it is natural for us all to be attracted to low-fee investments.  A simple formula to keep in mind is:  Gross Return – Expenses – Taxes = Net Return.

 But what about financial vehicles with no fees?  Is there such a thing? In the past week, I have heard people claiming there are no fees on Fixed/Indexed Annuities, CDs, and even on several well-known, no-load mutual funds.  For this article, we will focus our attention on the first two products, as the third doesn’t even warrant an argument.
The key with each of these is the definition of “fees.”  Are banks and insurance companies non-profit entities?  Do they work for free?  Clearly, they must be generating revenue and profit from annuities and CDs, so what is the catch?
The trick with each of these is using a fixed or stated return.  Instead of disclosing the gross return generated from your money, they simply offer a Net Return (before taxes), which is derived using the formula:  Stated/Fixed Return to Investor = Gross Return – Spread (expenses & profit).  Depending on the product, the spread is typically 2-4%. 
So by offering a fixed or stated return, they avoid having to disclose the expenses embedded in the product.  Technically, there are no “fees,” but there are certainly expenses.  Is this wrong?
While I do not believe it is wrong to offer products with a fixed or stated return, it is very deceptive to sell them using the pitch of “no fees,” especially when comparing them to other products where the fees and expenses are disclosed.  This is magnified with many Equity-Indexed Annuities, in which the insurance companies can move the “caps” (stated return) to assure their own profitability. 
The bottom line – there are no investment products with zero expenses, costs, or fees.  Be wary of anyone selling a product using the “no fee” pitch.

Disclosure: No position