For someone to invest with my firm in mutual funds - commission-based as opposed to fee-based - the amount of cost will be perfectly predictable. The fund charges a set amount based on the type of funds (equity or bond, bond usually being about .5-1% lower) and the amount invested in the fund family. More money in a single fund family lowers the total percentage charged.
Again, the amount of cost the fund incurs based on changes in the fund investments is irrelevant to the cost to the client. That’s made up in the annual management fee (which should range from 0.25% and down for ones that I have in the stable).
For fee-based billing they should also not matter. The client will be charged the same annual percentage regardless of whether the funds inside their account turn over at a 0.1% rate or a 300% rate. Same fee and the fund family eats the transaction fees.
Zulema, good luck with your meeting. Be sure to ask her about the upcoming changes to fee structures caused by the soon-to-be-released Department of Labor rules regarding costs for retirement accounts. Don’t let her dodge. If she tries to get you to sign on as a commission-based account THEN has to swap you over to fee-based because of the new regulations she’ll be double dipping. It’s not allowed at my firm and we’ll be giving some money back once the new regs go into place.
Thanks, it’s good to know (for the record, I did follow up and check the guy out with my state’s regulation office).
But it was a good way to find the type of advisor I was looking for. The alternative of using a Google search meant getting results for Edward Jones or Merril Lynch types of advisors, which was exactly what I wasn’t looking for.
Zulema,
Please take the time to research, read, and research some more concerning this subject. You may decide to buy a washing machine based entirely on SD recommendations, but please don’t make an investment decision that affects your LIFE SAVINGS solely upon opinion represented here. Some is spot on, some perhaps not so much. I apologize for sounding paternal, however many people give less thought to a lifetime investment direction than they do toward their next purchase of gasoline.
Not that you appear to be of this ilk…You’re here on SD after all!.. But I’m speaking in general terms.
The percentages, terms, and exceptions mentioned here are too numerous and complicated to address in any sensible fashion here, less a manifesto. Hence the suggestion for further reading (you seem to have your “investment advisor” bullshit radar fairly well attuned). Run, don’t walk, away from your present contact. The “Per compliance”/“via email” nonsense is merely a deceitful attempt at hiding fees from you in the guise of (non existent) governmental regulation… This is in fact, a Corporate policy, NOT a Federal regulation… How convenient for them that they claim it is REQUIRED that they must personally talk to you in order to reveal the actual numbers. Sort of like dealing with a car salesman and his manager, no?
Good primers are: “Stock Investing for Dummies”, “401(k)s for Dummies”, “Stock Investing for Dummies” Take it from there.
Please take note of any reference to “FIDUCARY STANDARD” that you may encounter, this is very important. Most so called financial advisors hold no truck with this concept. Meaning that maximization of your life savings are not their primary concern, but rather, making as much money for themselves on sales commissions and carrying fees irrespective of your account balance, are their PRIMARY mission, irrespective of the investor’s account balance.
We are not making any decisions right away, we know there is no rush.
I was just looking over Vanguard’s fee schedule and they were able to put it all together in an understandable format, there’s no reason the person we’re talking to can’t. I’m pretty sure she has a company provided list of fees that she can refer to for herself.
I will check out the Dummies books, I usually find them very helpful.
Neither the advisor nor the OP claimed it was due to “governmental regulation”. And the advisor is being neither “deceitful” nor “hiding fees”, they just want to deliver them in person and not via email. Sales tactic? Absofreakinlutely. Deceitful? No.
Bernard Madoff was a Registered Investment Advisor and held to the fiduciary standard. Google that name if you don’t know who he is or why this is relevant.
Zulema, please take note of any reference to “FIDUCIARY STANDARD” as somehow being indicative of competence, honesty, or business integrity. Most so called internet message board hacks hold no truck with this concept.
They work for a living, and expect to get paid for their services. The plumber, doctor, auto mechanic, and dry cleaner are also trying to make a living - I mean <gasp!> “making as much money for themselves on sales commissions and carrying fees irrespective of your account balance” <quelle horreur!> - and they aren’t automatically assumed to be unethical or working against the client’s best interest.
Actually, in a fee based (advisory) relationship the maximization of your account balance is directly aligned to “making as much money for themselves on sales commissions and carrying fees”. They charge a percentage of your account balance per year, growing that account balance grows their fee.
“Brain Surgery For Dummies” is also a good one, but many people still choose to hire a professional.
Seriously though, those books will prepare you well for the discussion with your advisor. Once you find out what the advisor can do for you, and how much they charge, you might decide you can do it yourself and not pay for their services. (Pro tip - most people can handle the basics of personal investing on their own.) But once you know what you’re getting into, and can see the advisors sales-y tactics for what they are, you might decide to let them do it.
Most personal investing is kind of like changing the oil in your car. Most people can do it, some actually do and some choose to pay someone else to do it for them. Not because they can’t, but because it’s a service they choose to pay for. You want to pay for investment services? No problem, there are lots of reputable advisors out there who would like your business. You don’t want to pay for investment services? No problem, read some books. Unless you have lots (and lots) or money or complicated financial situation you’ll likely do no better or worse than paying an advisor to do it for you.
You are mistaken about this and lots of people make the same mistake. The cost of the turnover is relevant to the client because the higher cost of turnover comes straight out of the fund’s portfolio and is not disclosed as an expense to the investor because it is unknowable in advance.
Here, for example, is what the Vanguard 500 Index prospectus (p. 2) says about turnover:
The transaction costs from turnover do not come out of the management fee. The fund pays a management fee directly to the fund’s adviser and the fund also pays transaction costs related to portfolio turnover to the variety of broker-dealers that execute the fund’s trades. If you look closely at other prospectuses, you will generally see a similar disclosure. Many of them aren’t as clear as Vanguard though.
I read an article recently that stated that ‘financial advisor’ merely have to invest their clients in a suitable fashion, which leaves quite a bit of leeway for fees and even investments that are not in the best interest of the client. What you want is a ‘fiduciary’ who is required to put the client’s financial interest above the advisor’s interests.
To provide a bit more context, “investment advisors” are already subject to fiduciary requirements. Even FINRA agrees that broker-dealers (the people you will generally deal with in a financial advisor context) should be held to a fiduciary standard too. They just don’t agree with the DOL’s proposed rule, which is somewhat inconsistent with the SEC’s existing fiduciary rules for investment advisors.
With an email (or a fax, or a letter), you have something in writing to which you (or if necessary a lawyer, regulator, investigator, manager, etc.) may refer later.
When the information is being delivered only orally, either in person or on the phone, you have nothing to prove what was said. (Remember, the response was that discussing it in person or via phone was allowed; nothing was said about delivering something in writing.) That means that any convenient “differing memories” about what was discussed are automatically your word against theirs, and so very difficult to prove. To me, loud screaming sirens and flashing lights are going off: this person, or this firm, wants to make sure you can’t prove what she said, and yes, that reeks of deception.
And “compliance” is usually taken to mean “compliance with applicable laws and regulations”; if that’s not what she means in this particular context, again she’s being deceitful by not clarifying what she’s complying with.
And do you typically tell the auto mechanic “oh, fix my car and tell me later how much it cost”? Me, I don’t. I ask up front, “what do you think is wrong and what will it cost to fix that?”, then I can look at his/her answer and decide whether the mechanic is probably doing right by me or planning to replace the alternator for the third time in six months.
Financial advisors have the ability to make more money for themselves by churning an account to generate extra commissions; that presents a perverse incentive not present at the garage (at least not to the same degree–the auto mechanic can only charge me when I take the vehicle to the shop, but an unethical advisor can run up charges on every business day).
Speaking as someone with a background in broker-dealer compliance, I note that there may indeed be a corporate policy against e-mailing you fee disclosure information. But not because the firm is trying to conceal something. Instead, the actual disclosure is complex and nuanced (what products are you buying? Are they traded on exchanges or not? Is the firm acting as your agent to find a particular security or is it selling stuff that it already owns to you? Does it get any payment from the suppliers of the security, or not?). That kind of disclosure is likely included in any account opening documents that you sign --and you absolutely should review it before you sign–and mailed to you once a year if you remain a customer, after really careful review by lawyers to make sure it is complete and accurate.
The problem with an individual client broker or investment advisor trying to boil those complicated facts down to a short couple of e-mail paragraphs is that there’s a huge potential for misstatements. Which, under Federal securities law, can amount to felonies. Bad idea.
On the other hand, if the person you’re dealing with claims that the firm doesn’t have any such standard fee disclosures, or that you can’t see them until after you give them some money to invest, get another advisor and another firm. That’s a red flag about …oh…30 by 40 feet big.
To put these 2%-2.5% numbers in another light… Consider that one common rule of thumb (when retired and drawing down your account) is to limit annual withdrawals to 4% of your account - including fees.
So, 2% fee means you get half and the advisor gets half. Does that sound right?
I’d be astounded if the 2-2.5% was an annual fee. I’ve heard of them that high but it’s rare. That sounds more like a breakpoint set upfront commission charge.
After 20 years of successful IRA stock trades with a broker, I was pitched a plan to combine the IRA with my other retirement accounts.
The plan was for an automatically rebalanced set of a dozen funds from a major fund company. As explained to me, it would be like having my own pension plan carefully managed and rebalanced to suit my needs and risk tolerance.
The all inclusive fee was 2% for a household balance of a million or less, dropping to 1% for 1-5 million. Half the fees went to the fund company and half to the brokerage. My broker was upfront about getting 0.5% annually.
And that’s why we’re getting the new DoL rules. I find that absurdly high and I’ve only seen numbers like that on plans from independents. I think I mentioned up there that I’ve seen them as high as 4% but my firm isn’t anywhere near that high…and I have the right to discount.
I’d welcome a straight fiduciary level with all of my clients. Having different clients with different levels - even if it’s their choice - becomes a headache.
Even the funds themselves can provide kickbacks to the financial advisor’s company. It would be hard to get a true accounting of total compensation as a function of your investment that is being paid.
I find bogleheads.org to be informative. My own personal rules of thumb are to be cheap with fees, ignore volatility, and not do things I don’t understand at least 75% of. For example I don’t understand tax loss harvesting or backdoor IRAs so I don’t bother with those.
(Continuing the analogy.) We’re not suggesting the OP become a brain surgeon using a For Dummies book, but learn more about what a patient facing brain surgery needs to know, what questions to ask, etc.
An incredibly different approach to the issue. The rest of your post is similarly overly defensive, misleading or off topic.