Am I Paying Too Much for Financial Advice and Investment Management in Huntsville?
What should I pay for financial advice? How do I know if I’m paying too much? How do I even know how much I’m paying? Should I pay fees for an annuity? These are all common questions we hear from our Huntsville clients. The system is unfortunately designed to be opaque. Our goal here is to provide simple guiding principles and then provide the steps you can use to asses your current situation.
Guiding Principles: How much should I pay?
In our view, you should target total fees to be 1.25% or less. That includes the fees to you pay to your broker or advisor plus ALL underlying investment management and sales fees. According to the Investment Company Institute, the average equity mutual fund charges 0.50% and the average bond fund charges 0.42%. If you pay your advisor 1% plus have a 60/40 allocation to average fee mutual funds, that means you are really paying 1.46%. The percentage seems small, but simply reducing fees by 0.25% over 30 years may result in more than $350,000 in excess capital*. There aren’t many quick wins in investing; but evaluating your total portfolio fee structure might be the most valuable 30-minutes in your lifetime!
How do I calculate my current fee structure?
If you have a good advisor in Huntsville, they should be able to tell you your all-in cost for last year. If they are squeamish, then you know something might be up. Investment fees don’t have to be complex, certain firms choose to add complexity to make it difficult to understand total cost.
Your advisory fee, if you pay one, should be a line item on your statement each month or quarter. To gather the underlying investment management fees, you will have to do some digging through your brokerage firm’s or the mutual fund’s website. You need to find the total “net-expense” ratio of the fund and multiply by the total percentage of your portfolio invested in the fund. Adding up the weighted fee for each fund will show you the total cost of your investment management. In addition to advisory fees and investment management fees, if your advisor charges commissions, then you need to look for sales loads and other charges. We’ve outlined a number of these below that may help you evaluate your total fee structure.
Sound complex? It is. We recommend working with a professional to assess your portfolio fees. We would be happy to look at your portfolio and run the numbers for you! Click here to schedule a short call to discuss.
Also, check our our video overview on YouTube for more clarity on assessing your fees.
Fee Calculation Example, Illustrative Only.
Fees to Watch For (Yes, the list is entirely too long!)
Common Investment and Brokerage Fees
Advisory Fee / Wrap Fee: A percentage of your assets charged monthly or quarterly based on the total value of the account. These fees increase as the value of the account increases and are reduced when it declines.
Fund Management Fees: This is the cost of managing the investments within a mutual fund or ETF. For large index ETFs, these fees may be 0.10% or less. However, for complex, actively managed funds, fees may still be more than 1.0%. These are added to any advisory fee you pay.
Brokerage Commission: Brokerages may not charge management fees for their “advice,” but instead charge every time you transact. Brokerage fees may apply to stocks, bonds, mutual funds and any other type of asset purchased in a brokerage account. These fees have been reduced over the past decade and are now often free or very low for institutions and online investors. However, trades conduced by phone or in-person still may carry fees over $50 (yikes).
Mutual Fund Sales Loads: Advisors may charge clients to invest in mutual funds, in addition to the commission and fund management fee. Sales loads are paid to the advisor out of the funds to be invested. For example, if a client invests $10,000 into a fund with a 5% sales load, the fund on day 1 would have a balance of $9,500 and $500 would go to the advisor. That’s a big performance hole for the fund to dig out of already. Funds can also charge back-end loads, so the you pay an additional fee when the assets are withdrawn if they are not held for a specific amount of time.
12b-1 Fees: Another fee that advisors may change clients for investing in mutual funds. 12b-1 fees are collected as part of the mutual fund fee and paid to the advisor. These can be up to 1%, and may push the total expense of the mutual fund above 2% on an annual basis.
Bond Spreads: Often bond accounts will be managed “for free” with “no fees.” When has anything good ever been free? Its common for bonds to trade without commission, but the broker charges more than the market price to sell the bond to the investor. In other words, the bond is trading at $99 and the client can buy the bond at $100, meaning the broker makes the $1 difference.
Annuity Charges:
Annuities tend to have particularly high fee structures.
Sales Commissions: Fees paid to the advisor that sells the annuity to the client and are anywhere from 1% - 10% depending on the type of annuity.
Administrative Fee: This is a fee paid to the annuity company to “administer your account” annually, typically about 0.3% per year.
Mortality Charges: These are paid to the insurance company to cover the costs of death benefits and can range from 0.5% to 1.5% per year
Fund Management Fees: In variable annuities with investment portfolios, clients pay for the underlying investment management within each mutual fund. These fees vary from 0.5% to 1.5% depending on the fund
Surrender Charges: In order to pay those high sales commissions, annuities may charge you up to 7% to cancel the contract before a specific date. Yikes!
Notes:
*Fee benefit assumes a $1,000,000 portfolio, invested for 30 years with a 7% growth rate; fees are reduced from 1.50% to 1.25%.
Fee Table is an illustrative example. Fund data as of 1/21/2022.
Sources:
Investment Company Institute, https://www.ici.org/system/files/attachments/pdf/per27-03.pdf
Annuity.org, https://www.annuity.org/annuities/fees-and-commissions/