What are hidden fees?
The reality is that most of these fees are not hidden, just hard to find. In fact, Federal, State and FINRA regulations require disclosure of all these fees to the client. It is important that any investor that is seeking professional financial advice understand where to find these fees and how much they are being charged.
We are not saying all fees are excessive. We all expect to pay a reasonable fee for professional advice and services and none is more valuable than financial planning and investment advice. But times have changed rapidly and many financial advisors have not adjusted their fees accordingly. Technology has made investment tools available to anyone that wants to use them and automated much of what financial advisors do. Also, there are many low-cost investment options that simply were not available 20 years ago.
Many investors assume or have been told that paying an advisor or fund fee that is higher than average means they will get higher than average returns. While some advisors and funds may be able to out perform in the short run, which often requires risky trading strategies, but in the long run it is hard to find any advisor or fund that out performs similar asset classes. We want investors to know that if you choose to pay your advisor or invest in funds that charge a premium fee, we hope you are getting premium service and performance.
Here are a few of the fees to watch for:
- Asset Management or Wrap Fees: Under a typical wrap-fee program, a client will pay the sponsor a single fee (typically no more than 2.5% of the client's total assets held within the account or under management) for management, brokerage, custody and other services provided under the program.
- Expense Ratio:For mutual funds and other open-ended investment funds, these represent annual expenses, asset management, marketing, administration. The industry average is 1.25% of your holdings every year.
- Trade Execution/Transaction Fees: These are charged by a Broker when you or your advisor buy or sell securities. Be on the look out for excessive trading in your accounts.
- Front-End Load: Certain mutual funds will charge a fee when you buy shares. This is usually done to discourage people from making frequent purchase and sales of the fund. It also locks you in for the long haul or you risk losing money.
- Back-End Load: Like Front-End Load, some mutual funds will charge a fee when you sell shares. Often this will include a Continguent Deferred Sales Charge which is a sales charge that is waived if you buy a certain number of shares and hold them a required term, usually 5-10 years. This is also done to discourage people from jumping in and out of the fund and invest for the long term.
- No Load: Just as it sounds, these mutual funds do not have a purchase or sales charge. This is fairly common now. But understand that No-Load does not mean No-Fee, see Expense Ratio.
- 12b-1 Fees: A 12b-1 fee is an annual marketing or distribution fee on a mutual fund. The 12b-1 fee is mainly used to reward intermediaries for selling a fund's shares.
- Commissions: Advisors may get a cut of the 12b-1 fee as a commission, especially if you they put clients into a front-end or back-end load fund. Also, if you purchase annuities, especially variable annuities, pay close attention to the commissions you are paying.
- Financial Planning: Beware the free financial planning services. Usually these are offered to lure in new clients, they enter your data into some software and it spits out a 70 page financial plan you will never read. If you understand the value of financial planning, make sure your financial planner knows more about you than just the balance in your accounts.
- Account Fees: Increasingly Broker-Dealers and the advisors that use them are charging Annual Account Fees for the inconvience of administering small accounts. If you have small investment accounts, typically less than $100,000, check your statements carefully for these extra fees.