How much is 1% worth? It, of course, depends on the scenario.
In many cases, one percent of an item can easily disappear without notice. When it comes to investing, however, 1% can make an enormous impact on your return in the long run. Understanding how your investment firm structures and discloses its fees can help you maximize your returns—and meet your goals more quickly.
If that extra 1% in your pocket meant you could retire one year earlier, would you notice then?
This month we sat down with CWA Partner Brian Bortz, a Certified Financial Planner and Investment Advisor Representative, who offered three tips to help you understand the different types of fees you may be paying:
1. Understand the different types of firms
Investment firms can fall into one of two categories—the traditional brokerage model or an advisory model, and depending on your situation, the difference between the two could have a significant effect on your bottom line. A brokerage model is a sales-based model where the broker earns a commission, on products sold, similar to the way one could associate with real estate or insurance sales. An advisory model is generally a fee-based model in which the advisor is compensated with a fixed retainer, percentage of the investment assets, or a combination of both.
Because brokerage model professionals are paid based on how and what investments they sell, it may be tough to feel you are receiving unbiased advice for your portfolio. A professional in a brokerage firm may appear more like a salesperson than a financial planner. In an advisory model, however, your advisor is just that—an experienced consultant who is required to provide advice that is in your best interest.
“A firm using an advisory model must provide a recommendation that they believe will work best for your portfolio,” says Bortz. As an advisory firm, we sit on the same side of the table as our investors to ensure our recommendations are what we believe will help them achieve their goals.”
2. Know your all-in fee
It’s common for advisory firms to only present one side of the story when it comes to fees.
Advisory fees are just the cost of hiring an advisor, and do not take into account other fees that investors pay. The biggest percentage is typically the fees on mutual funds and other investments. These are fees charged against the fund itself (typically called fund-level fees). In addition, investors can also be paying other fees like custodial fees, platform charges, and trading costs. Investors tend to not notice fund level fees as they typically get taken out of the return, or in other words, are paid by the fund out of the fund assets.
While you might appear to be paying less at Firm A than Firm B, it can be difficult to be sure. Confusing fee structures can appear at both advisory and brokerage firms. While mutual fund expenses will directly affect the value of your portfolio, the additional custodial, platform and advisor level fees may be harder to pinpoint. Bortz suggests investors use AdviserInfo.Sec.Gov to review a firm’s ADV and create a side-by-side comparison of fees—though it’s important to note these fees might not illuminate the commission structure of a brokerage firm.
“Understand all of the levels of fees with your advisor when making comparisons,” suggests Bortz. “When fees are not hidden throughout multiple line items, you’ll know what you’re paying, and you can feel confident in making an informed investment choice to keep more of your money.”
3. Ask to see your advisor’s portfolio
While it’s easy to get caught up in fees, it’s important to consider other factors which could affect your investment. Bortz advises investors to consider both fees and performance when choosing an investment advisor or manager.
“Higher advisory fees just means a higher hurdle that the advisor and money manager has to get over each year,” Bortz said.
Investment fees can be a game of numbers, and it can get complicated quickly. Choosing an advisor you trust; who understands your long-term goals for investing and who can help simplify the process by explaining clearly all the fees you pay will allow you to invest with confidence.