Nothing annoys me more than not knowing what I am agreeing to pay someone. I like things to be clear cut when it comes to my money and I want to pay fairly for services. I am a business-owner myself, and understand the importance of being paid for my work. On the other side, I want to spend wisely, paying for what I need and not overpaying. I assume most people feel this way, which is why knowing what your investment fees are is important. The irony is not lost on me that I’m in the financial industry – one where ambiguous fees are the norm. For this reason, it’s incredibly important to me that my clients understand my fee structure.
It’s important to recognize that when you buy any investment product, there are going to be fees. Sometimes they are clearly stated, but unfortunately, many are also “hidden.” There are four main types or layers of fees that you need to be aware of in order to make the best decisions about your investments.
Advisor fees
This fee is the money that will be paid to the person that is helping you purchase the investment product, regardless of which product that is. Whether it be mutual funds, individual stocks or bonds, annuities, or anything that will help grow your money, an advisor fee is paid to the person making the suggestions. The way in which financial advisors are paid varies.
Underlying investment fees
For any investment that is more than a stock or bond, such as a mutual fund or annuity, there is an investment company making the decision about what stocks, bonds or other types of holdings to have within the investment. Those companies are paid through the fund and their fees are taken out prior to your seeing the performance of the funds. Some portion of your initial investment, then, is taken as a fee that goes directly to the investment company.
Trading fees
Dependent upon where you invest your money, there will be various trading fees associated with the buying and selling of each investment. These fees vary widely between investments and from whom you are buying the investments. Oftentimes, part of the trading fee will be paid to the financial advisor who is helping you make the trade.
Custodial fees
When investments are held by an outside third party responsible for ensuring authorized access or for making changes to your portfolio, there are fees associated with that responsibility. The custodian sends your monthly or quarterly statements, which is an audited accounting of your money – leaving very little room for theft. (One reason Bernie Madoff was able to steal investor’s money was because his firm was the custodian. At Guiding Wealth Management, we will only invest your money through an outside custodian as an extra layer of protection for our clients.) The custodian fees are sometimes within the investment, or can be a separate line item on your statement. These fees vary with the type of investment and which custodian you use.
The most important thing that you can do as an educated investor is to simply ask who you are paying and for what services you are paying them. If the advisor can’t or won’t answer your question, start looking for another advisor. If they only talk about the fees they are being paid or the fees the investment company are paid, then know that there are other fees that you should be aware of.
This shouldn’t be complicated; you deserve straightforward answers. You want a financial advisor you can trust, and not knowing the fees you’re being charged makes it difficult to build that trust.
Find more tips on hiring a financial advisor here.