Let’s start with the biggest problem facing your financial advisor’s fee structure: It’s riddled with conflicts of interest.
If your advisor is not a Fee Only financial advisor, then you are exposing yourself to being sold something that you don’t need.
Who needs that when you can demand and get better?
Fee Based vs. Fee Only
There is quite a bit of industry confusion (Wall Street and Big Brokerage love to confuse investors) about Fee Only and Fee Based.
Let’s settle this right here and now: Fee Based is NOT free of conflicts of interest. Take it one step further and go Fee ONLY.
Both types of advisors will typically charge you a fee based upon a percentage of your assets, but the big distinction is that the Fee Only advisor can’t and won’t sell you anything. For instance, if during the course of business your Fee Only advisor identifies a need for you to purchase an investment product that charges a commission, then that advisor will need to refer you to the best person to sell you that product.
Another example: life insurance and annuities. These two investment products are the biggest culprits of advisors gone bad because they’re the last of investment products that have a sales component that requires an agent to charge a commission. They both require, in essence, the presence of a conflict of interest.
Yes, I said that.
If, however, you hire a Fee Only advisor to vet the precise product that is right for you — whether or not you even need that product — then rest assured the agent/advisor that is getting the commission is actually selling you something that you need. You may need a car, but do you need a Lexus? Or will a Volvo suffice?
Get it? Let a Fee Only advisor help you make objective decisions around product sales that can otherwise be sullied with conflicts of interest, which won’t protect you or your wallet.
Number one biggest problem, done. The second biggest problem is that you are paying too much.
While I tend to loathe generalities, I will offer the clichéd “look to your left and look to your right” line. Do it — they’re paying too much for an advisor and so are you! Typically, advisors who charge an investment management fee based on assets under management are charging north of 1% per year, which is too much.
Portfolio Fees Refresher
There are typically three types of fees you’re being charged to play in the investing arena:
- Advisor management fee
- Transaction/trading costs to buy and sell investments
- Investment fees, or the “expense ratio” of the investments (mutual funds and ETFs) in your account
When all is said and done, the three fees above should total less than 1.3% per year. If you pay .8% too much in annual fees, research shows that it will end up costing you upwards of 20% of your entire retirement nest egg. As my roadshow goes, this is the difference between vacationing annually in Paris, versus Peoria. I have friends from Peoria, but they don’t aspire to vacation there every year…
If, like your neighbor, you’re paying 1% for an advisor, have NO TRANSACTION costs (this is possible, by the way), and your investment fees average 1%, then you’re paying 2% per year — putting you closer to Peoria than Paris down the road. Look to pay an advisor less than 1% and make sure they’re fee conscious about their investment choices so those fees stay under .40% on average.
FINRA has a terrific Mutual Fund Analyzer tool that will assist in learning about the expenses of the mutual funds you own. As for the annual expense ratio of the ETFs you own, simply type the symbol and the words “expense ratio” and let the information age tell you in few key strokes what they charge. Easy as 1-2-3!
Want easier? Click here to get a free customized Morningstar™ Fee Analysis of your portfolio. No obligation — just promises of Paris, and not Peoria.
So go Fee Only, keep your fees under 1.3% per year and Paris is all yours. Your two biggest investing problems = solved!