What Everybody Needs to Know About Investment Fees

If you are trying to find out what you’re paying in fees and it’s taking longer than 15-20 minutes to get an answer, you might want to make a change. 

 

I recently read an article in The Wall Street Journal where a reporter went on an epic quest to discover exactly what fees she was paying within her employer 401(k) plan. Unfortunately, the difficulties encountered, and the time invested, only led her back to where she started - confused and unclear.

This is an all too common experience for investors today. I was moved by her story and reached out to see if she ever found answers to the valid questions she was asking. Her response was telling. She was receiving so many emails in response to her article, more response than she had received from anything else she had ever written, that she felt she did not have time to even set up a quick call.

This got me wondering, why are fees such a hot topic, consistently generating significant attention and emotional turmoil?

I think it comes down to one key concept: value.

Finding Value

Most people are OK paying for something if they can perceive an appropriate amount of value in it. Based on the complexity and confusion investors encounter when trying to clearly understand how much you are paying in fees, how can anyone decide if they are getting value? If you have no idea what you are paying, how can you make this important decision? No one likes the feeling of being confused or that feeling of being kept in the dark, especially when trying to decide if they are willing or unwilling to pay for something.

We live in the “information age.” We have access to more technology and more information on our phones today than NASA scientists had when launching rockets into space 30 to 40 years ago, and this is also true of professionals in the world of financial services. There is no reason why it should be so hard to clarify and clearly explain investment fees so that the investor can decide if the services being offered provide the desired levels of value. Especially when considering the push for fiduciary standards across the financial services industry, clients and investors should come to expect 100% disclosure and clarity when it comes to understanding the investment fees they are going to pay. 

Getting back to the question of why fees are such a hot topic, I do not think it is because fees are inherently bad - this is how many financial services professionals get paid, and there is nothing wrong with that as most provide a valuable service to their clients. The issue, I think, is feeling a lack of control and awareness when a client or investor wants to know what they are really paying, and finding that no one is able to quickly provide an exact answer. That is anything but comforting.

How can an adviser uphold his or her fiduciary commitment to clients if they can neither understand, nor clearly explain fees? How can an adviser be sure they are doing what is in the client’s best interests? Again, it is not the fees that are inherently bad, it is the lack of clarity surrounding them. It is the complete inability to decide if the fees are fair, if they make sense, if the services being provided are helping to reach defined goals, and if they are providing value. 

Finding Your "All In" Number

When starting your investigation into investment and advisory fees, there are a few basic categories you can use to help clarify who you are paying and exactly what you are paying for. I encourage people to have a clear understanding of their “All In” number so they can understand the total they are paying in fees. In reality, this “All In” number should be clearly disclosed and understood before any investment decisions are made. See the categories below:

Four Fee Categories:

• Adviser Fee: This is the fee that is charged by your financial adviser if you have decided to hire someone for additional help. This can range widely based on different pricing structures, but annual averages should be somewhere around 1% - 1.5% of assets under management (AUM), depending on account size. Some advisers may use an annual flat “fee for service” model or even charge by the hour. The adviser fee is sometimes mistaken for all the fees the client is paying, but this is usually not the case.

• Investment Management Fees: These are the fees charged by money managers to allocate investments within the funds and strategies being used to invest client money. These fees can range widely and can drive up the “All In” number behind the scenes without proper disclosure and close monitoring. Investment management fees can range from 0.3% - 2.5% per year levied on the amount invested.

• Platform Fees: Depending on how the adviser is setting up his or her investment models, there may be added fees for the investment platform being used. These fees can range in the area of 0.2% - 0.5%. These can be harder to spot and often relate to different custodians and/or TAMP-UMA services. 

• Transaction Costs: These also happen behind the scenes and can cause the most difficulty when trying to find them out. Depending on the investment style of the funds being used, there can be costs for the buys and sells executed to adjust the holdings of a given fund or strategy. They can vary from year to year depending on the level of trading activity. An efficiently run fund or strategy could cost a few hundred dollars per year in addition to adviser, platform and management fees. Those with high internal turnover of investments can quickly get into the thousands of dollars per year.

 

Use these categories to help better understand what fees you are paying, and add them all up to get your true “All In” number. With this total fee in mind, now you can properly assess if it is worth it or if you want to look around to find better value elsewhere. Keeping everything at or below 2% is a decent general benchmark to keep in mind.

For example: A 1.2% adviser fee, investment management fees of 0.5%, and a platform fee of 0.3% would give you an “All In” total fee of 2% before counting transaction costs.

It should take no more than 10 to 15 minutes to find an answer to the simple question, “What am I paying in fees?" If it takes more than 30 minutes of actual research, or no one can get back to you within a few hours with a clear answer, you may want to reconsider who you are working with when seeking financial advice. 

How We Work

Simplicity is important to us, so we’ve developed a streamlined yet comprehensive process. It all starts with getting to know one another during a 20-30 minute phone call. This gives us a chance to get acquainted and learn more about one another. Together, we’ll decide if it makes sense to take the next step, which is a complimentary in-person initial consultation. During this discussion, we’ll dive into your finances and get a better understanding of your current situation, future goals, and how we might best be of value.

From there, if we decide to work together, we’ll develop your financial plan and meet regularly to monitor and make adjustments as needed.

Take Action

If you’re approaching retirement and have questions about income needs, estate planning, tax planning, or other financial concerns, we’d be happy to discuss your situation and help you understand your best way forward. To take the first step and schedule a complimentary 20-30 minute phone conversation, call 858-255-6703 or email  ian.maxwell@revirescowealth.com.