Fees, What Fees?

Fees, What Fees?

by Erin McMenemon on May 21, 2018 The All-Weather Investor

You may have heard stories in the news about “hidden” fees charged by advisors, brokers, and digital trading platforms. Because fees can erode an investor’s return over time, we thought it would be interesting to comment on this. To help, we will use a study by Personal Capital which came out last year highlighting some of the “hidden fees” charged to investors.

Before we get into some of their findings, it is important to understand that fees can come in many forms, but the three most relevant are:

  1. Advisory Fees. These are sometimes called Management Fees and they represent what the advisor charges to manage and advise on your portfolio. These fees are typically structured as a percentage of assets and typically range from around 1% to upwards of 3%.

  2. Product Related Expenses. These are sometimes called Expense Ratios and often go unnoticed by the client because they are indirectly charged through the mutual funds, ETF’s, annuities, and other products. These are truly the hidden fees and can range from a mere fraction of a percent up to 2% or more.
  3. Commissions/Trading Fees. These fees are charged when something is bought or sold and can literally range from nothing to 10% or more of the amount being invested.

In this study by Personal Capital, we thought we would focus on the portion that most closely relates to how BCM charges for our services. The following chart shows the results from various firms that charge an Advisory Fee (#1 above and column 1 in the chart) and adds that to the Product Related Expenses in the column entitled “Average Fund Fees”. The last column shows the Total Estimated Fees.

The key takeaway is that fees vary greatly between firms and investment advisors. To get a sense of where BCM is in the chart above, our Advisory Fee starts at 1.0% and declines from there, our Average Fund Fee is approximately 0.285%, making our Total Estimated Fee about 1.285%. This certainly compares quite favorably to all of the above except the bottom three firms, which, of course, are either straight up Robo Advisors, or a combination of online and telephone support. No local professionals giving any real personal advice.

Why It Matters

The effect that higher fees can make over time is graphically illustrated below, which shows the difference in two $100,000 portfolios, invested exactly the same, but one has a 1% total fee and the other has a 3% total fee. We will let the graph speak for itself as to “Why it Matters”!

So, what’s an investor to do? Here are three things to consider:

Choose a Fiduciary, not a Broker. We will expand more on this in an upcoming blog post, but for now you should know this: A Broker works for a big firm, or the product company itself, they most often make their living on commissions, and they are not legally required to act in their client’s best interest. A Fiduciary (like BCM), on the other hand, works for and is compensated by the client through a fee arrangement and is legally required to act in the client’s best interest.

Fully Understand Fees: Whether you are considering a Broker or a Fiduciary, make sure to get a complete accounting of all three areas of fees/expenses we mentioned at the beginning of the article.

Find a Good Fit. Ask questions and make sure you know exactly what you are getting and what you are paying. If you realize that your advisor/broker is charging high fees, or if you are not getting the type of service you need, see if there are any alternative arrangements. If needed, shop around and find a firm that can not only serve your investment management and financial planning needs, but that is also transparent in the way they operate and the fees they charge. Then, armed with the results of this study, you will have something to compare to.