Fees

Why do you see your advisor on the golf course more often than you do in their office? How much are you really paying them for their service? Pricing is purposefully hidden by investment firms so let’s walk through the ways different advisors are paid and how to find out how much you are paying.

Unless you are buying individual stocks, you are always paying something extra on the money you invest. What you are paying for is performance (making your money grow) or advice. There are three fees that you may be paying on your money for either.

First, there are internal expenses – this is the money that the investment vehicle, fund, or index is charging you to invest your money. These range dramatically depending on the investment selection. There are portfolios and funds available for less than 0.05% each year and here are also funds or portfolios who charge a yearly fee greater than 4%. We believe that internal expenses are important to pay attention to but should be as low as possible for the expected return or work involved.

As an example, you shouldn’t be paying an internal expense of 2% to a private equity fund portfolio with a net return of 9% when you can get an SP 500 fund of .01% expense with the same average return.

Second, there are loading expenses or commissions – loading expenses are fees that are charged by the fund when money is first deposited. This is also known as an up-front commission and can act as an incentive for an Advisor to recommend it. These often show up on your investment statement as an A Share and the commissions can be as high as 8% of each dollar invested. Fortunately, many funds and portfolios have completely removed these fees and it’s rare that using a fund with an up-front commission is necessary.

Last, there are external expenses or advisor fees. There are two main ways an advisor can be paid.

Some advisors can receive commissions for investments recommended either up front or as a trail. This means that part of the money you put into the investment come back to the advisor. While commissions are not a bad thing, people should be paid for a service they provide but they can create a tricky situation.
- Did your advisor select an investment that is the best option for you, or did they pick an investment that pays them the highest commission? We highly recommend asking exactly what commissions are being paid when working with an advisor.
Some advisors make a choice to be fee only. Fee only removes any commission related incentives. A fee-only advisor is paid a transparent fee based on the total assets they manage for the client. This is stated as a percentage of assets or flat dollar amount related to account size.

Service

You may see your advisor on the golf course more often than behind their desk and wonder how they have time to do that. Aren’t they supposed to be managing your money?

Your fees pay for either investment performance or advice. The investment performance is usually covered by both the internal expense and the advisor’s fee. They should be vetting the investment options for you and presenting you with the ones that fit your objectives best. The advisor’s fee also covers other financial advice. How much to save, how to take money out, how to pay less taxes, etc.

But with any service it is important to understand your service schedule and how often you get what you are paying for. Your advisor should have a consistent meeting schedule each year to be proactive because life changes and your investments change. They should be reaching out with new ideas that pertain to your situation so that you can be proactive in your planning.

How an advisor gets paid and the service schedule they use is crucial to getting the most value out of the relationship. Let’s look at an example:

A client is working with a commission-based advisor who uses traditional mutual funds vs a client working with a fee-only advisor who focuses on low-cost ETFs. Assuming the client invests $10,000 and returns are the same with both advisors – they would end up with close to 10-15% more in their account after 30 years with the fee only advisor. This does not include any additional loading fees the client would have if they investment more money.

It’s not bad to pay more for the commission-based advisor if they are providing significantly more return or value for the extra cost. But if they aren’t then, you are paying more for less and that’s just not smart.

Key Takeaways

Find out what you are paying today – ask your advisor for a detailed billing statement of all your costs. If you manage investments yourself, make sure you are paying attention to your expense ratios and focus on using low-cost ETFs.
Ask your advisor about your service schedule. It’s helpful to have this documented with formal expectations. If you are not seeing your advisor for a review of your plans and goals at least once a year, that is a red flag.
If your advisor makes money on commissions – ask them to disclose the amount each time so you can be sure you are not getting a product and instead are getting the advice you need.
Make sure you get the most for your money when it comes to advice.

Disclaimer: This post is for informational purposes only and is never to be taken as advice or a recommendation. Talk to a tax or legal professional to determine how this information best applies to your personal situation.