Hands In Your Pocket

Or how much should you pay your investment advisor?
By Win Wachsmann. Isn’t that how you feel sometimes?

You’ve worked hard to earn and save your money. Now everywhere you turn someone is putting their hand into your pocket for part of your wealth.

One group of people who have their hand in your pocket directly or indirectly are the stock brokers, mutual fund salespeople, money managers or investment and financial advisors who are “managing” your money.

All these professional investment managers have now become a commodity. That means that they are viewed as all providing the same level of service and the only difference between them is the fees they charge.

The result: a level of distrust for all advisors in the financial services industry.

Is this really true? Is the only difference the fees they charge?

Advisors are paid for their services in three ways –

1. Commissions,
2. Fee-based – Combination of commission and fee only and
3. Fees only

1. Stock brokers and mutual fund reps make money when they sell a stock or a fund.

• Stock brokers receive a transaction fee or a flat fee ranging from 0.5% – 1% based on account size for holding the securities (this does not include mutual fund management fees or ETF management fees). This fee gets you stock picking advice and the personal advice of the stock broker – who may have another 400 to 800 clients just like you.
• The fees for mutual funds are called loads and are charged

1. when you buy a fund (front-end load 0% – 5%),
2. when you sell a fund (back-end load 5.5% if sold in the first year and declining thereafter), or,
3. on an annual basis (a flat fee based on Assets Under Management (AUM) These fees can range from 0.5% to 1.25% for the advisor portion only.

Mutual fund management fees are usually embedded and can add additional 1.5% to the total fee). Some of these mutual funds also provide financial planning and estate planning advice without additional charge.

2. Fee-based advisors may receive both fees and commissions. They will charge fees based on Assets Under Management (AUM) that can range from 0.5% to 1.25% for their financial/investment planning services and receive commissions for insurance products as well. Total management fees can thus range from 1.50% to as high as 3.5% for insurance based funds when you combine both investment advisor fees and mutual fund manager fees.

3. Fee only advisors are paid directly by their clients and do not receive commissions or fees based on Assets Under Management. This fee can be a flat retainer fee, or an hourly rate. The hourly or retainer fee can vary widely based on advisor experience and complexity of a client’s financial affairs.
Some people ask “Why should I pay you for the services my commission advisor does for free?” They believe that commission advisors are not being paid by the client.

Remember No One Works For Free.

All advisors will get paid!

Either by having the company deduct the fee from the investments or by charging a fee directly. Even though you aren’t cutting your investment advisor a monthly or annual cheque, you can be assured their fee is being deducted from the investments.

One important factor to consider is that for the same fee (or commission) that you pay a stock broker or mutual fund representative to buy and sell stocks and funds, you can receive comprehensive, integrated wealth planning from a full service financial advisor (planner).

A fee-based or fee-only advisor is only too willing to offer access to their fully integrated wealth management services.

These services start with a personalized risk tolerance analysis – are you willing to gamble your assets to achieve a greater return, or are you looking for a SAFE harbour for your hard-earned assets? Or somewhere in between. You decide.

In consultation, these professionals will then design a comprehensive wealth management plan that will suggest ways to maximize investment growth reduce risk and minimize taxes.

The Bottom Line?

When evaluating investment advisors, selecting the advisor with the lowest fee is not always the most prudent decision. Select the advisor with the largest range of services and management professionals who will help you reduce risk, maximize wealth and reduce and/or postpone the inevitable taxes.

Paying half a percent more which will result in tens of thousands of dollars in growth or significant tax savings over the next ten years is a small investment for future growth.

Were you aware that one company in Canada is offering a guaranteed 5% return on invested funds? (guaranteed by a major bank and based on the amount invested)

Were you aware that another company in Canada showed returns of between 12% and 25% during the last year alone? (a mixed portfolio)

This article was written to help the average Joe and Josephine understand a that financial advisors all receive fees and b. all fees are not equal.

As in all areas of life, you get what you pay for.

Remember to look at value and not just the absolute cost.

Please feel free to contact the writer if you have any further questions.

Win Wachsmann
Win Wachsmann has been helping businesses improve their marketing and helping them get ready to sell their business. He doubles as an author, journalist, syndicated columnist, filmmaker and businessman who makes his home in the Fraser Valley of British Columbia. His articles and columns can be found in some of the finest offline and online magazines, journals and media properties.
He can be reached at win@wachsmanncommunications.com.