Most people have no idea how much they are paying their financial advisor. In a way, we believe this is a problem. Many times, the fees you “see” are only those easily spotted above the surface. There could be other fees you aren’t seeing.
It should come as no surprise that we believe financial advisors add value to their clients’ lives and should be compensated for it. But, that doesn’t mean they can charge whatever they want!
Let’s look at the 4 types of fees you might be paying as a client:
- Financial advisor fee
- Fund fee (mutual fund or exchange traded fund (ETF))
- Trading costs (fees to TD Ameritrade, Schwab, Fidelity, etc)
Financial Advisor Fee: This is the direct fee that you pay your financial advisor for their services. This is usually stated as a % of your account value paid each year. For example, if you are paying 1% and your account value is $1,000,000, then you will pay $10,000 / year. Sometimes we see this fee being charged as a flat amount per year.
A key point to consider is what this fee includes. Is this fee to simply manage your investments or is your advisor involved in other areas of your financial life? We believe a successful long term client relationship is contingent upon our involvement in multiple areas of his or her financial life!
Fund Fee: This is the fee you pay to utilize a particular investment fund. Companies such as American Funds, Vanguard, and Dimensional Fund Advisors create funds that you can invest in. It costs them money to create and manage these funds so they charge a fee (rightfully so!).
These fees are expressed as a % that is paid / year based on how much money you have invested in that fund. For example, if the fund fee is 1% and you hold $1,000,000 of that fund, you are paying $10,000 / year to own that fund. These fees can range from 0.05% to 2.00%.
You need to be aware of how much your funds are charging you and who is benefiting from that fee. Sometimes, financial advisors receive a portion of this fee from the fund company as an incentive to use their funds. We don’t think this is a good idea!
Commissions: This is another fee paid directly to the advisor from the investment fund companies. This is usually stated as a % paid up front based on the initial purchase amount. For example, your advisor might get paid a 5% commission if you invest in XYZ fund. If you buy $1,000,000 of XYZ fund, your advisor get’s paid $50,000. We don’t think this is a good idea either!
Trading Costs: The companies that hold your accounts and provide your monthly account statements need to make a living as well. These companies include TD Ameritrade, Fidelity, Schwab and many others. They usually get paid when your financial advisor makes changes to your account. This is often times expressed as a $ amount per trade. If Schwab charges $24 / trade and your advisor buys 5 different funds, the fee to Schwab is $120.
As you can see, this can get complex which is why people tend to ignore it. This is your money and these fees can add up! If you don’t understand what your advisor is charging you, ask him or her. They owe you an explanation!