Are you paying too much for financial advice?

Better yet, do you know how much you are actually paying?  It is not necessarily a simple question, as  quite often, the fees are imbedded in asset prices, product costs and/or deducted directly from your investment account.

Some common fees include:

Commissions Insurance, annuities, bonds
Upfront loads Certain mutual funds
Wrap or asset management fees Brokers, some advisors and asset managers
Fund expenses All mutual funds and ETF’s
Trading fees Costs to purchase individual stocks and ETF’s
Hourly or fixed fees Certain advisors

One of the most fundamental questions you should ask your advisor, planner, broker and/or insurance agent each and every year is: What are my total costs, and how am I paying them.  In many cases, you may be surprised to find you are paying several different fees, commissions and/or charges in any one year.  And the reason you need to ask is that your fees will add up over time and can significantly impact your results. 

Let’s take a look at a couple of real life examples, based upon my experience:

Example #1:  Let’s say you work with a multi-product broker or asset manager, you could be paying .75 to 1% in asset management fees, an additional .50 – .75 % in mutual fund/stock trading/bond fees and potentially an additional commission for the purchase of an insurance product.  Assuming you have a $500k portfolio and (ignoring the insurance commission)  you could be paying between $6,250. and $8,750 per year.

Example #2: Let’s say you work with a fee-only advisor (like RFA), who works with you to manage your investments and provides financial planning services, you may pay $2,000 – $3,000 for the initial planning services (fee each year is based upon the mutually agreed upon planning goals) plus an additional .25 – .40 % to a mutual fund company such as Vanguard.   Again, assuming a $500k portfolio you could be paying between $3,250 and $5,000, in your first year.

Obviously, the second alternative is more affordable, but this is just year one.  Let’s look at the impact of fees over time and as your investment portfolio grows….. this is where the cost issue is most profound.

 

Example 1 Example 2
Year Asset Balance % Fee Annual Cost % Fee $ Fee Flat Fee Annual Cost
1  $      500,000 1.75%  $      8,750 0.40%  $          2,000  $   3,000  $       5,000
2  $      550,000 1.75%  $      9,625 0.40%  $          2,200  $   3,000  $       5,200
3  $      600,000 1.75%  $    10,500 0.40%  $          2,400  $   3,000  $       5,400
4  $      650,000 1.75%  $    11,375 0.40%  $          2,600  $   3,000  $       5,600
5  $      700,000 1.75%  $    12,250 0.40%  $          2,800  $   3,000  $       5,800
Total Cost  $    52,500  $     27,000

When you compare the total five year cost of example #1 above to example #2, the message is even more convincing.  Fees add up and can be significant over time, especially when they are based upon total assets.   So, choose your advisor wisely.

This, however, may not be the total story, the follow up question is:  What is the value of the services and advice I am receiving?   For a discuss of on that question, please stay tuned to this space as that will be the subject of my next writing.