Investors should know what fees they are paying for their accounts. Keeping cost low is one the keys to successful investing. I continue to see new clients that have been paying account fees that are much higher than they need to be.
There are three basic fees that you are subject to when dealing with an investment advisor: management fees, asset fees, and transaction fees.
Management fees are the fees that the advisor charges your portfolio on an ongoing basis. He or she will often say I charge x percent to manage your portfolio. Expenses are paid from this and the rest is split between the advisor and firm. This is usually the largest of the three expenses.
The second fee is the asset fee charged by the underlying securities in your portfolio. If your portfolio is comprised of only individual stocks and bonds your asset fee is almost zero. But, if your portfolio holds mutual funds or exchange traded funds there is a cost. You should know these costs. Your advisor should be able to calculate that fee for you.
The third cost is the
transaction cost. Sometimes, this is included in the management fee but often times it is broken out separately. This cost is the cost of each buy and sell order. The first two costs are relatively easy to find. The transaction cost can be more difficult to determine.
If your portfolio is composed mostly of mutual funds that transaction fee is often hidden. To the best of my knowledge it is not detailed in the prospectus given to new buyers of a mutual fund. It is in a supplemental prospectus that you need to request. Good luck with getting that. In that case I suggest looking at the turnover rate of each mutual fund. If the turnover rate is high you can expect the transaction expense to be high as well. While you may not be able to determine the exact amount of those expenses you can determine whether your transaction fee is high or low.
If your advisor makes all of the decisions or if an outside money manager is employed to make those decisions just remember each transaction has a cost to it. In this case the advisor should be able to tell you the transaction costs.
Now that you know the costs associated with your accounts, here's how to make that knowledge work for you. Maybe even lower your overall cost in the process.
First, insist that these fees are not only described to you in percentages, but in dollars as well. Fees are becoming much more transparent than in the past and it is becoming more common to have fees broken down by account in both percentages and dollar amounts. This should be done, in writing, annually and in context with an annual review that most clients have with their advisors. Seeing your fees stated in dollar amounts can be eye opening.
Now that you are armed with this information you can better determine if your fees are reasonable. If you think they are too high there are steps you can now take to lower them.
Your transaction fees can be lowered simply by changing you investment style. Do not agree to a style that involves a lot of buying and selling. High transaction fees do not improve performance. They increase the drag on it. Look for mutual funds that have low turnover rates to help reduce that transaction cost.
If your asset cost is high ask your advisor to include lower cost mutual funds or exchange traded funds to reduce cost.
Your management fee is typically the largest cost. At one time these fees pushed upward of 3 percent of the assets under management. These fees have come down dramatically over the years. My experience shows me that these fees are on average around 1 percent of the assets. The newest trend I have observed in this area is a capping of fees at a certain dollar amount. This capping of fees can tremendously reduce management fees for larger accounts.
Knowing your cost both in percentage terms and dollar amounts is important to successful investing. Take the effort to learn what they are.
Michael T. Doll, an Investment Advisor with the Longboat Key Financial Group, can be reached at 941-383-2300 ext 6 or Michaeltdoll@longboatkeyfinancial.com.