Although high fees can drain a portfolio over time, many investors are "in the dark" about what they pay. It is an adviser's job to explain all fees associated with the investments they recommend. If you don't feel so informed, get a second opinion. In the meantime, know that most investment arrangements have the following four components:
Custodial Fees – This is the cost for an investment company to maintain an account and hold your money. With brokerage accounts, for example, these fees are usually charged annually (some companies will waive them if they are compensated in another way). Take note: custodial fees are usually only a small part of the total cost of investing.
Transaction Fees – Different types of transaction fees can be lumped into the cost of buying or selling securities. First, there's the "Dealer Markup". This is the profit a broker-dealer firm may receive from selling a stock to you from their own inventory. Second, there's the "Spread" you pay when buying individual bonds from a broker (they sell it to you for more than they would buy it from you; it's kind of like buying or selling a used car). Third, there's "Broker Commissions". With a discount broker, commissions can be very low; if you are working with a traditional stockbroker, they might serve as the broker's primary compensation for his advice. The commission may be a percentage of the purchase or sale, or it can be paid to the broker by a third party.
Product Fees – Mutual funds and annuities are two very common investment products used by advisers. A no-load index fund might cost as little as .07% per year, while some actively-managed investments can cost over 2% a year. Annuity fees can also vary widely - from very economical to unapologetically exorbitant.
Adviser Fees – Depending on the size of the account being managed, investment advisers will typically charge between 1 to 2% each year. In this capacity, the adviser is held to a fiduciary standard; that means they are supposed to keep a lid on expenses and not "double-dip" by collecting commissions (or other compensation) on the same assets from which they draw a fee. Despite some complexity, the bottom line on fees is rather simple: Regardless of how you get your advice, always ask for full disclosure of all fees and compensation in writing.
Have a financial question you'd like answered here? Email: Questions@PlanStronger.com