One of the hot topics in the financial advisory and wealth management world has been centered on the many different types of commissions and financial advisor fees families and individuals incur when hiring a financial advisor. In this article, I hope to clarify the often-misunderstood world of fees when it comes to your investments and advisors. This should help you understand exactly how much you are paying for your investments and advice, then arm you with appropriate questions for the next sit-down you have with your advisor. Let’s start from the top…
Most advisors today make their money by charging you an annual fee. They call these “advisory” or “management” fees. This fee is a percentage of whatever the value is of your accounts managed. For instance, if the total value of your accounts is $1 million and your advisor has a 1% financial advisor fee, your advisor will receive $10,000 in advisory fees. This amount will change as the account value goes up or down.
Your advisor will want your account value to increase, so his fee will increase. Here, interests are aligned. Beware the advisor who says they don’t charge advisory fees. This typically means they are making their money off commissions from selling you certain products. In our opinion, always go with a FEE-ONLY fiduciary financial advisor. Look out for advisors who say they are “fee-based.” This is just a tricky way to say that although they may typically use fee-only products/services, they can still sell you something with a commission if they want.
The typical starting point for advisory fees is 1%, which means the advisor needs to provide 1% or more value to clients to earn their fees. That can be tough to measure, but something every individual should assess with their advisor.
Remember, the value of the fee should come from more than just the investment portfolio they recommend. Value can be added from financial planning strategies such as:
Ask your advisor what his/her advisory or management fees are. If they’re north of one percent, begin asking questions. I have seen some exorbitant fees. The best thing to do is just ask! It’s also important to speak about product fees and commissions.
After you have found a fairly priced and competent advisor, they will likely recommend an investment portfolio for you based on your goals, risk tolerances, etc. Hold on, here comes the potential for more fees and some commissions, too.
One thing both ETFs and mutual funds have in common is an “expense ratio.” This is just another way of saying “annual fee.” These can range WIDELY! For instance, a Vanguard Index Fund usually has an annual expense ratio of about 0.03% for holding their fund. For example, if you invest $1 million in that particular Vanguard Index Fund, they will take out $300 in fees that year. Not bad.
Many things will affect expense ratios, including management (active vs. passive), share classes (institutional share class is typically the lowest), etc. Expense ratios below 0.50% are reasonable, and any fund with a higher expense ratio needs to “prove its cost.” If a fund charges me more every year, it must show me it can outperform a comparable index or benchmark over time. If it can’t, you’re best off choosing a low-cost ETF or index fund.
The final thing to be aware of when it comes to your investment portfolio is the commissions or “loads” charged to get into the fund. Luckily, most brokerages have done away with commissions charged for purchasing ETFs or stocks. There are still a lot of mutual funds that charge what they call a “load fee.”
We don’t like loads at all and will even go as far as to say that you should never get into any mutual fund with a “load.” These loads can be charged on any new investment or withdrawal into the fund.
They can be very pricey, too! For instance, my wife used to be in an old fund with an old advisor that had a “front load” of 5.75%. This means that for every $1,000 she invested into this fund, $57.50 was taken off the top before it was even invested! Then she had the expense ratio to deal with once she was in the fund. She had to dig out of a 5.75% hole before she even started!
I was not happy. I would advise anyone considering an advisor who invests in funds with “loads” to run away.
Before investing, take the time to understand the structure and financial advisor fees or other costs associated with any product. In addition to those listed above, there may also be other miscellaneous fees.
Check if your account has quarterly or annual “account maintenance fees.” They aren’t common these days, but you still might find them. There are too many brokerages out there now that don’t charge these fees, and it feels like a cheeky way for a brokerage firm to make an easy buck for nothing.
Fees and commissions are typically included in insurance products. There are commission-free insurance options out there now (which we love), but the most important thing here is ensuring you have appropriate coverage. Don’t pay for more insurance than you need, but make sure you and your family are covered!
Your advisor should have the tools you need to visualize fees.
Below is an aid for visualizing fees and how they can add up, inhibiting growth and compounding! Remember, even 0.50% compounded annually can add up!
Higher Fee Scenario
Lower Fee Scenario
Advisory Fee: 1.40%
Advisory Fee: 0.75%
Fund Expense Ratio Avg.: 0.75%
Fund Expense Ratio Avg.: 0.20%
Front Load?: No
Front Load?: No
Total Annual Fees: 2.15%
Total Annual Fees: 0.95%
The 1.20% saved in lower fees can make a huge difference over a long period with compounding. Always make sure you understand all the fees that you pay.
We are fee-only fiduciary financial advisors who always work in your best interest to build and manage wealth. Contact us any time for more information about your account structures, financial advisor fees, or other questions about your financial planning needs.
The views expressed represent the opinion of Good Life Asset Strategies, LLC. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and nonproprietary sources that have not been independently verified for accuracy or completeness.
Schedule a complimentary 30-minute consultation.