How Money Management Fees Differ
Financial help comes in many flavors, whether your advisor calls himself a broker, financial planner, advisor or something else. Some distinctions are purely marketing but there are important differences to note.
Brokers, Financial Advisors and Planners
Brokers, financial advisors and financial planners are largely the same thing and can offer similar advice as your retirement manager. Individuals vary and may offer additional add-ons such as tax planning, but the easiest way to understand financial advisor fees is to examine how they get paid. They can be paid a fee for managing your money as well as commissions whenever you buy one of their products or make a trade. Their advice may be spot on, but this compensation structure can also create strong conflicts of interest. Whether it’s your local advisor you’ve been with for years or a broker at a large firm, they’re likely compensated the same way. When choosing the right retirement money manager it's important to know the key differences and similarities between how they earn money management fees.
Investment advisors provide personalized portfolio services to private clients and institutions. They usually operate on a fee-only or fee-based schedule, which reduces conflicts of interest. You pay a flat rate based on the amount of money you invest with them. They generally don’t sell you products or earn commissions on trades.
Hedge funds are generally limited to very high net worth investors and operate as pooled, professionally managed investment vehicles that often use complicated strategies. They typically have a high account minimum (which can be upwards of $1 million) and lock up your funds for a minimum period of time (can be as long as 7 or more years). For most private investors who aren’t capable of locking up millions of dollars (you can always lose), hedge funds aren’t an option. The fee structure in hedge funds can favor the managers as they may get 1-2% in annual management fees as wells as 10-20% or more of the profits.
Takeaway: A lot of differences in investment money management fees are more marketing puffery than how they actually manage your money. Take a look at how managers get paid, and financial advisor fees, to see where their interests are.
- Fee-Only Advisory: Our clients pay a tiered, competitive fee based on value of the assets we manage for you.*
- Commissions: In a traditional brokerage relationship, clients often pay money manager fees for each purchase or sale of a stock. In bond trading, these fees are often added to the bond price (a “mark-up”). This can increase the broker’s incentive to trade more, which can hurt performance.
- Mutual Fund Sales Loads: Mutual funds can carry upfront and/or deferred sales charges between 3% and 8.5% of the amount invested.** In addition, funds can carry 12b-1 fees, management expenses and underlying transaction costs.
- Annuity Sales: Annuity sales can compensate a brokerage in many ways. For variable annuities, fees like a Mortality and Expense charge, benefit rider costs, subaccount costs, surrender charges and more may apply. For fixed or equity-indexed annuities, performance calculations generally provide a spread for the issue/broker.
- Revenue Sharing: Often, brokerages receive compensation—called revenue sharing—for the sale of mutual funds and other securities. These fees are agreed to under contract between the fund company and broker-dealer and can influence the menu of investment options the broker offers.
- Fee-Based Products: Often, broker-dealers offer annual percentage fee-based products that outsource much of the investment process to third-party firms. These third-party firms may actually be mutual funds, meaning some ongoing expenses like management expenses still apply.
- Account Fees: Broker-dealers often charge nominal fees for account maintenance or specific transaction types.
*Fisher Investments’ (FI) clients will incur fees in addition to the management fee paid to FI, as stated above. Such fees can include brokerage commissions, other custodian fees and expenses for investing in exchange-traded funds. FI does not earn such fees.
**Loads, Bill Barker, The Motley Fool, http://www.fool.com/school/mutualfunds/costs/loads.htm FINRA rules permit sales loads up to 8.5%