Before we get into the logistics of uncovering your total fees, we need to address the elephant in the room – you cannot control markets, but you can control the fees you pay to access them. This is the most important concept when determining whether your fees are reasonable.
Paying an advisory to predict the market? Stop.
Paying an advisor to pick stocks? Stop.
Don’t take my word for it, look at the data: SPIVA | S&P Dow Jones Indices (spglobal.com).
So, what should you pay for and how much should it cost? The answer to this question is “it depends.”
Let's review a few important factors.
Any reputable investment advisor will be willing and able to provide a summary of the fees you are paying now and in the future. This should list the expense ratios of your actual investment holdings, the investment fees your advisor is charging you directly (or indirectly), and any commissions (if applicable) that you are paying. You have to get a grasp on the fees you are currently paying before determining if they are reasonable.
Fee-Only: Fee-only advisors receive no additional compensation based on what they recommend you purchase. They usually charge a percent of your assets under management (AUM), and the good ones tend to have relatively high investment minimums. There is a variation of this model that is fee-only and advice-only, which is listed below. If you are not currently working with an advisor that can say they are fee-only, you should consider a switch.
Fee-Based: While it sounds similar to fee-only, the models are very different. Fee-based advisors not only charge you a fee directly but are also able to obtain additional compensation based on the investment recommendations they make for you. This should be considered an extreme conflict of interest and requires additional due diligence for you the investor. Isn’t the whole point of hiring someone to manage your money to make it easier on you? Hiring a fee-based advisor might do the opposite.
Advice-only: As technology has made it easier to manage your own accounts, advice-only advisory firms are becoming more prevalent. They charge flat-fees and/or hourly, don’t manage client assets, and as such can provide a completely different level of service and advice that is agnostic to whether you have $100k or $100 million to investment.
More than ever, there is a variety of fee-only advisory firms that can cater to exactly what you are looking for. Know what bucket you fall into:
Different life stages will call for different services models in almost any industry – including financial advising, and financial advisors tend to profit the most from your inertia. If you don’t feel that you are communicating with your advisor very often nor need the majority of the services they offer, why are you continuing to pay them? The dirty secret in our industry is that most of the work is done in the first 12 months of the relationship, while most of the revenue is collected in the decade after that work is done. Be aware of this – one person's profit is another's expense.
Your level of assets does not correlate with the services and advice needed. The growing number of ETFs available to all investors has also brought down the paywall that used to exist that required investors to work with an advisor to buy prudent investment products. In addition – the true benefit of a prudent advisor is organizing your finances, keeping your plan on target, and ensuring that your resources are assisting you with reaching your long-term goals. None of those services are related to the level of your assets, so why are you paying for asset management when the services are anything but? This mismatch invariably leads to investors paying more than they should for the services they need.
Want to discuss the fees you are paying and whether they are justified? Schedule a call with us.
This material has been prepared for informational purposes only and should not be used as investment, tax, legal or accounting advice. All investing involves risk. Past performance is no guarantee of future results. Diversification does not ensure a profit or guarantee against a loss. You should consult your own tax, legal and accounting advisors.
Frankly Finances is a registered investment advisor with the state of Florida and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration does not imply a certain level of skill or training. Please refer to our Form ADV Part 2A disclosure brochure for additional information regarding the qualifications and business practices of Frankly Finances.