In a financial advisory relationship, it is important for investors to understand the multitude of fees they may be required to pay.
When you walk into your CPA’s or attorney’s office, you sign an engagement letter, and pay a fee for their services; there are not a lot of hidden costs. Their engagement letter outlines expenses including charges for photocopies and interest charged on late payments. With your financial advisor, that may not necessarily be the case.
If you ask your financial advisor, “What is your fee?” the common response is, “a percentage of your Assets Under Management (AUM).” A percentage of your AUM is the percentage of money your advisor manages. So, if your advisor manages $1 million dollars, you pay $10,000 a year; some advisors charge more and some charge less. I read recently that a typical fee was 1.5% of AUM (Investment News).
A prudent investor seeking transparency, understanding and knowledge will ask about other potential fees, such as:
- Management fees;
- Sub-manager fees (if someone has been retained to manage a sub-portion of your portfolio);
- Sales charges;
- Transaction costs;
- Custodian fees (fees charged for the safekeeping of your securities and other administrative services like collecting dividends and interest);
- Performance fees;
- Mortality and expense fees (in certain investments like commission-based annuities);
- Mutual fund expenses;
- Operational expenses; and
- Surrender fees (in some annuities).
As an investment manager, I may go to a potential third-party money manager and say, “I’m looking at this investment for my client. What are their fees?” and they’ll typically reply, “The fee is x%, but the client will only see your fee on the statement.” I’ll reply and say, “The client still pays the fee whether they see it or not. They should know what they are paying.”
My charge to you as an individual investor is to know what you are paying and why. Compose a list of questions for your financial advisor to learn exactly what fees are being charged, to whom they are being given and how they will impact you. Also ask your advisor to see all performance net of fees.
My charge to the financial industry is that all fees become transparent. Over a 20- to 25-year investment period, fees can add up and cost investors a lot of money. I understand we have to earn our living, and if we are prudent and fiduciaries to our clients, we will earn a great living. However, the fees need to get easier for our clients to understand. This is paramount in establishing trust with them.
As an investor, you can’t control what the markets are going to do, but you can control the information you have when you’re doing your own investing: minimizing your taxes, keeping fees low and staying ahead of inflation.
Our firm prides itself on giving you all the information so you can make informed decisions that best suit your needs.