Financial advisory fees don’t always add up to good value
Trailing commissions, loads, transaction fees, administration fees. If your investment account statement looks like your advisor is shopping for a new Porsche, it might be time to revisit the whole issue of how your advisor is compensated. This is a complex problem, and much depends on the type of relationship you have and the kinds of accounts they manage. Here’s a look at some key advisor compensation benchmarks to consider to ensure you get value for your money.
Generally, you’ll pay separate commissions and sales charges if you deal with a brokerage firm or mutual fund salesperson on a non-discretionary basis. That means you’ll pay transaction costs and commissions every time you buy or sell a security.
How you get dinged for fees
The most basic do-it-yourself online trading account has no advisor, and you pay all transaction costs, fees, and commissions yourself.
The next level may be a “full service” stockbroker who might make investment recommendations and then execute trades for you. Stockbrokers are employed by brokerage firms the main objective of which is to distribute stocks. Depending on the arrangement you have made, a stockbroker may or may not have discretionary investment power over your portfolio. Mostly, though, stockbrokers earn their living by charging commissions on trades.
Mutual fund salespeople may represent one or several mutual fund companies. They may charge a sales commission, or “load” for selling you a fund, and they may also receive a commission from the fund company, called a “trailing commission.”
Trailing commissions are not paid by exchange-traded funds, because ETFs are traded like stocks on the open market. You pay only a brokerage commission when you buy or sell an ETF.
Essentially, a trailing commission, or trailer fee, is a fee paid by a mutual fund management company (from its own management fees, and thus is part of the MER of the fund) to the advisor or mutual fund dealer from whom you purchased the fund, as compensation for investment and financial planning services. Critics argue that trailer fees are simply incentives paid by fund companies to get advisors to push their product.
If you’re buying a mutual fund through a dealer or registered advisor, ask them whether they receive a trailer fee and how much it is. If you’re uncomfortable with such an arrangement, the solution is again quite simple: don’t invest in that fund or with that advisor.
Questions to ask your advisor about fees
I’m going to give you a list of questions you can ask your advisor about how they are compensated.
Very few advisors are likely to commit what would be defined as a “crime” (that is, fraud or theft). These people are outright criminals, but they’re few and far between. They are easily spotted, with promises of consistent (and unbelievable) high returns, shoddy bookkeeping, and evasive answers to basic questions.
More common are advisors who justify their actions under the heading, “Well, I have to make a living.” And that usually means a whole raft of fees, commissions, and charges against your portfolio, both stated and embedded.
Here are three questions to ask your advisor if you have any doubts whatsoever:
- Please give me in writing an explanation of services you provide for the fees you charge.
- Are there any embedded fees that are not apparent? Itemize all trailer fees (trailing commissions) and deferred sales charges on mutual funds.
- Please show me the value you have provided to me for the fees I am paying.
If your advisor rolls his eyes or brushes you off for asking questions like these, my advice is to get another advisor. It’s your money, you have a right to know, and your advisor just doesn’t get the whole concept of “advice.”
Typical investment advisor fees
Earlier I mentioned that separate fees and commissions arise when you deal with a broker or fund salesperson only for the purpose of buying and selling securities. Some financial advisors and planners will also use a commission-based approach, charging for each securities transaction separately, while also charging separate fees for various services like financial planning and portfolio management.
However, many financial planners and advisors are moving to a fee structure that represents a percentage of assets under management. Fees, commissions, administrative charges, and so on are typically included in this structure.
In my own practice, for example, fees range from 1.6% to 1.8% annually of assets under management, including all financial planning, investment advice, and portfolio management. Like many advisors, I cater to higher net worth clients, and typically, minimum account levels apply. High net worth accounts managed by independent advisors usually begin at a minimum of $250,000, but more often at $500,000.
How to spot a ripoff
If you have a high net worth account and your advisor is charging you a percentage of assets under management in the range I mentioned, but is also charging you sales fees, brokerage commissions, and other transaction costs separately, you are almost certainly being ripped off. Again – and I cannot emphasize this enough – ask your advisor to spell out in writing exactly what they are charging you, and for what services, and whether they are receiving trailer fees from mutual fund sales. If you’re not satisfied with the response, shop around for another advisor.
© 2015 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.