About halfway through my 24-year career as a financial advisor, I had a local gentleman come in to get a second opinion on his brokerage and retirement accounts. He was focused on just his account performance so when I asked him how much he was paying his financial advisor, his answer shocked me.

“I don’t pay my advisor anything and I’ve never paid him a single dime.” 

I thought to myself “Well, we just found the first financial advisor in the country to work for free.”

But I knew better. You’re certainly not going to get any “free lunches” in the financial advising world. I could clearly see on his statement that he had paid some upfront fees as well as he was continuing to pay fees on a yearly basis.

Fees come in a variety of ways in the financial planning world. To simplify it, there are fees that you can easily see and fees that are hidden or difficult to determine.

For example, the financial advising world has been shifting to an asset fee model over the years where instead of charging you a commission, you’re being charged a percentage on the amount you have invested. The reason this pricing model has become popular with advisors and investment firms is because it provides a reoccurring revenue stream each year. Asset management fees are on your statements but if you’re only looking at the account performance, or returns, you can easily miss the line that indicates the fee deduction.

The rule of thumb is you’ll pay 1% – 2% for accounts under $1 million and accounts over $1 million you’ll pay 1% and tiering down the more you invest.

It’s fairly easy to figure out how much you are being charged. Asset based accounts divide their annual fee into quarterly withdrawals out of your account. You’ll find the fee in transaction section of your statement where it might say

“Asset Fee for 01/01/2019-03/31/2019 is $712.51.” 

When you sign up for an asset-based account, you’ll sign documents stating what fee you’ll be charged going forward. It’s been my experience that most clients either do not pay attention to this or are confused by their advisor’s explanation of the fee.

I once had a prospective client come into my office who wanted a review on his accounts held with one of the major banks. His accounts totaled $1.5 million and his bank was charging him 2.25% to manage his money. I looked at him and told him he was being majorly overcharged by this bank. On average, most firms would charge him anywhere from .75%-1% on that dollar amount. He had no idea he was being charged over $33,000 a year by his advisor.

Asset based fees are fairly easy to find and calculate what you’re paying. However, investment products like mutual funds and annuities have expense fees built right into the product. But it’s important to know what these are because over a ten-year period, these can really add up and affect your overall return.

For example, let’s say a mutual fund through your advisor has a 4% upfront fee to purchase it. Let’s say that particular mutual fund has an expense fee of 1.25% a year. On $50,000, investment that would be a $2000 upfront fee to purchase it and an on-going fee of 1.25% a year. That isn’t necessarily a bad fund but it’s important to know what your true returns are and if you can do better in other funds or investment styles. Your growth may be undercut by your fees. There are many mutual funds that are performing well that have low expense fees. If you do it yourself, you can also save on the upfront fee.

As I mentioned above, asset-based charges (or what are often called fee-based accounts) have increasingly become more popular over the years. Now here’s something that you may not know about them. Your advisor might not be managing your money. That’s right, the person you have hired and trusted to take care of your money is often times either hiring a third-party money manager or that advisor’s corporate office is managing the money through various portfolios. Many of the large brokerage firms have designed portfolios where your money is being managed so your “customized” portfolio is being shared with 90,000 other folks thinking they have a similar “customized” portfolio designed just for them.

This begs the question “If my advisor is not managing my money, then why am I paying them $15,000 a year to do so?” To be fair about it, there are a lot of advisors and firms that are managing your money and you’re truly getting a “customized” portfolio based specifically on your needs and goals. However, many financial advisors at the larger firms are outsourcing the money management.   This is where you need to ask yourself if you’re paying $10,000+ in asset fees each year, are you truly getting $10,000 worth of value from it? Maybe, but probably not.

Tips to follow:

  • Nobody cares more about YOUR money than YOU do. Take interest in your money. Your advisor might be telling you “Oh everything is fine.” Don’t just take their word for it. Crunch the numbers yourself or get help doing it.
  • Ask your advisor how your money is being managed. Are they managing it personally or is a third party managing it? If being managed by a third party, is it in house or outsourced? Are you getting the personalized service you expect?
  • Know how much you are paying in fees. Do you know how much investing is costing you? Negotiate the fee. Advisors will not like this but the rate you are being charged may have some wiggle room.
  • If you’re unsure, get another opinion. Understand your investments. Don’t be afraid to ask questions. The investment world is complicated, but it is explainable. If you are paying for advice, that advice should also include educating you.

Well all this talk of retirement… and what it comes down to is Freedom! So that being said, Happy 4th of July!

Live free my friends

PS: Last week I launched my subscription based, investment advice only service. If you’re paying over $5,000 in investment fees, I can help you save thousands of dollars. How? I can help you identify what you’re paying, help you move to a platform like Charles Schwab or TD Ameritrade where you’ll pay no advisor fees, help you setup your portfolio, monitor it for you and make you aware of changes you’ll need to make in the future. It’s a massive savings. You’ll have to do a little bit of the work with me as your wingman, but I’ll be by your side helping you all along the way.

I spent 24 years as a senior level advisor and now I want to help you grow your money without you having the fear of just being sold something. As I’ve mentioned many times, I’m no longer in the product selling business. I’m in the advice and education business and that means that your success is my goal with no product or service agendas.