The financial services industry has evolved a lot since I started studying it in the 90’s. When I started, I witnessed advisors cold calling to sell CDs and Municipal bonds to get clients. Next it was commission-based trading that involved doing stock research and making decision on which stocks to sell and which ones to buy, the advisor would generate a list of clients with those securities and start at the top of the list calling each client to recommend the trade.
Now we are in the Advisory Fee era, it comes with its benefits and pitfalls. I totally agree with the asset fee-based system, and as a Portfolio Manager it is the best way in my opinion to manage a client’s account, although every client’s situation is different. However, what is often left out when Advisors discuss fees with clients is that above and beyond what fee is charged by the advisor is the fee inside the investment vehicle purchased.
The average Advisory fee per Advisory HQ for an investor who has $1 million to invest was 1% in 2016. Then depending on what is purchased for you, you could pay another 1% or more.
If you own Mutual Funds or Exchange Traded Funds (ETFs), they come with an additional cost that is taken out of the return of the fund. For instance, in its simplest form, if the holdings of the funds returned 5% over a period and the fund has a 1% fee, your return would show 4%. That is what you see as the performance, it’s not a line item for you, so a lot of investors think they don’t pay a fee. Just because you don’t see it doesn’t mean you’re not paying it.
A lot of investors realize something’s not right when the markets have moved upwards a certain percentage and their portfolio has not kept up with it. It can be confusing, however there is a way to measure this.
Determine an index that your portfolio should be measured against. S&P 500, Barclays Aggregate Bond Index or a blend of both. Measure your portfolio performance against the benchmarks. What you should be looking for is the index return minus fees. If you are drifting by either outperforming or underperforming, you should determine the reason.
We are different because our portfolios are managed in-house. We do the research and implement the strategy, meaning we do not buy any funds that are managed by a third party. This means the fee that you see is the fee that you pay.
If you don’t know what you’re paying or don’t understand how you’re paying for it, please give us a call and we will walk you through it.
Mick Graham, CPM®, AIF®
Branch Manager Raymond James
Financial Advisor Melbourne, FL
Any opinions are those of Mick Graham and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The Barclays Capital U.S. Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States-including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.
Individual investor’s results will vary. Past performance does not guarantee future results. Investing always involves risk, including the possibility of losing one’s entire investment. There is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds. The prospectus contains this and other information about mutual funds. The prospectus is available from our office [or from the fund company] and should be read carefully.
ETF shareholders should be aware that the general level of stock or bond prices may decline, thus affecting the value of an exchange-traded fund. Although exchange-traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the funds may not be able to exactly replicate the performance of the indexes because of fund expenses and other factors.
In a fee-based account clients pay a quarterly fee, based on the level of assets in the account, for the services of a financial advisor as part of an advisory relationship. In deciding to pay a fee rather than commissions, clients should understand that the fee may be higher than a commission alternative during periods of lower trading. Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. To the extent that clients intend to hold these securities, the internal expenses should be included when evaluating the costs of a fee-based account. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs. A list of additional considerations, as well as the fee schedule is available in the firm’s Form ADV Part 2A as well as the client agreement.