Guide
Jason Akridge
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Are you aware of all of the fees and expenses you might pay a financial firm for their advice? Many investors are not.
Are you aware of all of the fees and expenses you might pay a financial firm for their advice? Many investors are not.
Financial professionals receive compensation for their services and experience in a variety of ways. In general, the fees will fall into two main categories based on the type of firm – firms that fall under the “fiduciary standard” (Trust companies and Registered Investment Advisor [RIA] firms) and those that are under the “suitability standard” (e.g. broker-dealer, insurance, and annuity firms). Please be sure to read our guide on “What Is A Fiduciary and Why Should I Care”.
Fees Typically Charged By Fiduciary Firms
The majority of revenue for most fiduciary firms is derived from Assets Under Management (AUM) fees. The calculation is simply an annual percentage of the total market value of all financial assets with the firm. As the markets do well and a client’s investments grow as a result, revenue (in dollars) for the firm grows. The opposite also occurs – as the markets suffer pullbacks and a client’s investments decline in value, revenue (in dollars) for the firm also decline. This type of fee arrangement effectively aligns the interests of both the client and the firm.
Fiduciary firms may also charge a flat, retainer or hourly fee for their services. Generally, these firms are providing financial planning services but not full wealth management services.
Fees Typically Charged By Suitability Firms
Some investments charge a sales commission (also called a “load”, or in some instances a “12b-1 fee”) for every purchase or sale. The commission is then paid to the financial representative who sold the investment to the client, and to his or her employer. Commissions typically range from 3% to 8%. Using funds that pay a sales commission can present conflicts of interest.
Examples of investments that can, but don’t always, charge a sales commission are mutual funds and exchange-traded funds (ETFs). For publicly-traded mutual funds and ETFs sold in the US, www.morningstar.com is a good resource for researching whether and how much you are paying in commissions.
Examples of financial products that almost always charge a sales commission, and many of them charge a surprisingly high percentage, are annuities and permanent life insurance policies (e.g. whole life or universal life).
Expenses Related To Nearly All Financial Firms
There can be transaction fees charged when investments are bought or sold. These fees typically range between $2.95 and $9.95 for stock and ETF trades. Some firms will also charge for mutual fund trades.
All mutual funds and ETFs have costs associated with management of the fund. Examples of these costs include the research involved in security selection, the transaction costs of purchasing and selling securities, people costs, etc. The fund is compensated for these costs by charging a management fee. The internal expense ratio is the management fee as a percentage of the assets in the fund. The expenses can range from as low as .03% (as of mid-2018) for passive funds, to 2.00% and above for active funds.
Make sure you understand your “all in” costs when researching financial advice. Ask lots of questions. The cost for financial advice does not have to be punitive and can be well worth the investment.
Jason Akridge
Jason brings 24 years of wealth management experience to his clients and team at Integrity. His greatest passion is guiding his clients to define and achieve their vision for their wealth and life.
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