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?
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®
These fees are not reasonable. There's no reason to pay a 2% buy-in fee, which is really nothing more than a sales charge. The yearly management fee by itself might be reasonable if the financial adviser you would be working with would put your interest first. This does not seem to be the case. The representation that the funds have done well in the past has no bearing on what will happen in the future. I strongly doubt that their guidance and oversight will be of any value. You're better advised to find an adviser who will put your interest first. I suggest you go to https://www.napfa.org/find-an-advisor#tab=filters. That's the website of the National Association of Personal Financial Advisers. All of NAPFA's advisers are required to put your best interest first. I suggest you contact and meet with several. Then select the adviser with whom you are most comfortable.
No, your advisor is not charging reasonable fees. High fees can squander your returns. Managing your costs is one of the key principles for long-term investing, and in many cases can even be the most important one.
The buy-in sounds like a sales charge, not necessary. Justifying it as paying access for supposedly a fund that has done well over time is misleading. What does "done well" actually even mean? And you don't need to pay a sales charge to have access to low-cost, high-quality funds that track the market, like those from Vanguard. Their index funds consistently beat the more expensive active funds over the longer term. Consider also Dimensional funds, which you can only find through an approved Dimensional advisor. They are considered among the best in the industry.
On the surface, that .63% management fee may be reasonable (unless you have millions in assets under management there); however you haven't mentioned your portfolio turnover rate. Am wondering if your advisor has been advising frequent changes your holdings, ie selling this fund, buying that one, selling this stock, etc. In aggregate, all of these are would actions generate more fees and commissions, trickling up wealth from your account to theirs. Although it's difficult to know exactly what approach this advisor uses for investing, I agree with the few others in this thread who recommend that you seek a second and third opinion. Look for a fee-only, fiduciary investment advisor. He/she will work in your best interest, no commissions, no sales-agenda. Good luck.
You are not being taken advatage of in my opinion as these are standard fees for commision based funds. The question really comes down to are you getting what you think you are paying for. When the term guidance and oversight in managing my funds used, most people think the fund manager is managing to get the best risk adjusted returns, which would be the priority of a tactical style manager. However, what most investors do not realize is that whithin the context of a mutual funds, the portfolio managers job is to track or best the associative benchmark as much as possible. For instance, if this is an equity fund, the associated benchmark may likley be the S&P 500. According to Yahoo finance https://finance.yahoo.com/quote/SPY/performance/ the S&P 500 was down 36.97% in 2008. If the fund who uses the S&P 500 as their benchmark was only down 35%, the fund would be considererd outperfoming their benchmark and therfore rated higher among the rating agencies such as Morningstar. However, from the investor perspective, you may not be too pleased with being down that much especially if you just invested in the fund as it may take several years to get back to break even and subsequently have substantail opportunity cost. The same thing can occur with a fund that only charges 1% so being fee centric is not as important to me as haveing the right strategy in place. So from my point of view I try to focus on what the fund/porfolio strategy is trying to accomplish and make sure it is allighned with what a client is looking to acheive. No strategy can guarantee it will be succesfull, however it is my contention the many investors are not aware of the differences in portfolio strategy, asset allocation, core strategey, tactical etc. and so therefore measure an investiment based on fees alone which in my view is not the complete picture.
Depends on if you like your advisor or not. Fees don't matter if you feel you are getting your money's worth. The fact that you are asking the question says a lot. Here is a resource that might help: https://www.gcqualified.com/fiduciary