Let me begin by wishing you and your family the Happiest of Thanksgivings!
For those of you that have been reading my weekly emails for a while, you may recall that a little over a year ago, in late 2013, I started what I affectionately referred to as the “Wealthcare For Women Wednesday Q&A.”
My goal was to create a comfortable, safe environment where women could get together and discuss personal finance and get answers to any questions they had. These were once-a-month workshops that were held on – you guessed it – a Wednesday.
We had a few of these monthly meetings in late 2013 and early 2014 and had to navigate around the Atlanta ice storms earlier this year. And I received great feedback from the women that joined me for these meetings.
However, I quickly learned that with the combination of peoples’ busy schedules and Atlanta traffic (and weather), it was a challenge to find a good day/time to get together on a consistent basis.
So, “Wednesday Q&A” was short-lived as an in-person workshop.
However, “like a phoenix rising from Arizona” (that’s a Seinfeld reference), Wendesday Q&A is back baby!
Well, sort of.
A couple of months ago, I asked you for questions that you’d like me to answer, and I haven’t done a good job of following through.
So over the coming weeks, I’m going to answer the questions that you were kind enough to share with me.
Sorry I didn’t get to these sooner.
The first question: “How to find out how much I pay my financial advisor?“
I wish there were a simple, straightforward answer to this one.
Unfortunately, it depends . . .
Some advisors (and I include myself in this group) are very upfront and transparent about all the fees expenses associated with their services. These can include explicit fees that are deducted from your accounts as well as “internal” fees like mutual fund expense ratios and transaction costs.
For instance, my clients pay 1.25% on the 1st $500,000 of investment assets that I manage for them.
But there are also internal management fees associated with the ETFs (exchange traded funds) I use in my clients’ portfolios. These average roughly 0.10% per year.
And Fidelity, the independent custodian for most of my clients’ accounts charges $7.95 or $8.95 every time we buy or sell one of the ETFs in your portfolio. You get the lower $7.95 per trade cost if you sign up for monthly e-statements instead of mailed paper statements.
That’s it. That covers all the expenses associated with hiring me as your financial planner.
Pretty simple. Pretty straightforward.
Sadly, most advisors don’t make it this easy on you.
In fact, Sherlock Holmes would be hard-pressed to decipher some of the convoluted arrangements I’ve tried to interpret over the years.
A couple of examples are in order . . .
Many advisors aren’t paid by you, at least not directly. Instead, they are compensated based on the financial products they sell to you.
Let’s say they sell you a mutual fund. Some of these funds offer different payment arrangements to the advisor and his or her firm.
If an advisor recommends that you invest in a hypothetical fund XYZ, you may never see a dime come out of your account. But believe me, it ain’t free.
Many of these funds charge higher (or much, much higher) internal management expenses of 1.5%, 2% or more. Here are some of the worst offenders. And out of these above-average internal expenses — all of which are coming out of your returns — your advisor is compensated. Often, your advisor’s employer is also compensated out of these fees as well.
Whether it’s a brokerage account, your IRA or your 401k, the typical fees being charged are ridiculous.
And while you’re typically not writing a check for these fees, you’re absolutely paying them because they’re being deducted from your money that is invested in the fund.
If I haven’t thoroughly confused you yet, consider the potential for complexity and conflicts in the scenario above and then multiply it by 10. And now you can begin to glimpse the potential problems when advisors recommend things like non-traded REITs, annuities and “alternative” investments.
I’m not quite sure how they continue to exist, but there are still front-loaded mutual funds out there. Edward Jones brokers seem to be fond of recommending these to their clients. This is where you invest $100,000 in an “A Share” mutual fund only to have the fund deduct 3.5% of your money up front to pay a nice commission to your broker and you only get $96,500 of your original $100,000 invested in the fund. So your investment automatically starts 3.5% in the red.
Oh, and these funds still charge ongoing internal management fees as well.
OK, stepping off my soap box . . .
This isn’t a rant about mutual funds or any specific type of investment, though there are plenty to be wary of.
My point is there are many, many ways your advisor can get paid. Some are more transparent about this than others.
How do you figure it out?
Here are a couple of suggestions:
- Start by asking them point blank. It’s your money and you have every right to know what you’re paying (either explicitly or otherwise) for whatever advice you may be receiving. And if they can’t (or won’t) answer this question in detail to your satisfaction, I would run – don’t walk – away with your money as fast as possible.
- Get a 2nd opinion. Go to another advisor and ask him/her to review your portfolio in detail to figure out ALL of the costs associated with its management. And you shouldn’t pay a fee for a 2nd opinion like this either.
Don’t know who to go to for a 2nd opinion?
I have a suggestion. (and despite the title on that page, I extend the offer to men and couples as well)
I’m regularly surprised (and disappointed) to see just how much people are paying for financial advice. And imagine their surprise when I show them the cold, hard evidence.
The worst I’ve ever seen?
A 75+ year old woman with several annuity contracts that was paying more than 4% when all the fees, expenses, and riders were accounted for.
Your costs and expenses are one of the few things you can control when it comes to your investment portfolio. If you don’t know what you’re paying, I encourage you to do whatever it takes to find out.
You may be surprised with what you find.