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Is my potential financial advisor charging reasonable fees?

I am working with a financial advisory firm that a friend works with. The firm recommends investing in funds with a 2 percent buy-in fee. The firm gets a commission on that and they also get a commission on the yearly management fees that the funds charge which is 0.63 percent.

The advisors have pointed out that the funds I will be investing in will be in managed funds that have done well over time and that I will get their guidance and oversight in managing my funds. I am concerned about conflict of interest with an advisor in a commission-based arrangement. Are these fees reasonable, or am I being taken advantage of?

Choosing an Advisor
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June 2018

This is a great question and one I had to tackle myself last week with a client.  This particular client was working with myself and another advisor, but he felt the other advisor was offering a better deal because he was told they give teachers (his wife is a teacher) special discounts.  So they "managed" her 401(k) for 0.60% and they managed a taxable account for them, and he assumed they were being charged the same 0.60% for that account as well.  I charge 1% as a fee-only advisor, and clients receive investment management, retirement planning, business consulting, tax planning, etc.  The other advisor was "fee based" which is what you're dealing with in your question.  This means they can charge a fee and also receive commission, and too often it means muddy waters lead to deceptive sales tactics. 

I'm curious though when you say the investing will be done in managed funds if this means active funds or in a separately managed account.  The other advisor my client was working with isn't allowed to directly manage investments, because her firm (Broker/Dealer) doesn't let her.  So they always use separately managed accounts, but this just adds a layer of fees.  Now he pays her fee (which happened to be 1.20% by the way) and a fee to the actual manager.  The investment manager wasn't even using Institutional shares which meant there was another layer of fees built into the funds that were not necessary.  When we broke it all down, the client was paying close to 1% less with me than with the other advisor.  

Unfortunately I feel that this is an area where our industry gets a bad name, and sometimes rightfully so.  Many investors will look at Institutional share classes and see it requires a million dollar initital investment, and automatically think they can't have access to it.  However, if you work with a fee only advisor those minimums are usually waived.  I'd be happy to do a quick review of the funds they proposed for you or I can share with you a fee disclosure form that you can send your potential advisor.  Many other advisors have mentioned the XY Planning Network or NAPFA as organizations that use fee only financial advisors.  I agree and think both are great organizations and great resources.

Good luck to you,

Matt Ahrens, CIMA®

June 2018
June 2018
June 2018
June 2018