Risk vs. Return Yes but what about Fees vs. Return?
An Open Letter
Why is it that many investors see the markets at all-time highs but their accounts don’t go up at the same level? I argue that often they don’t know the full extent of their fees.
As a fellow professional who is charged with assisting clients achieve their goals, I made the decision a decade ago to charge my clients a fee based on the assets that I manage for them. My industry (financial advisory) has gone through a series of changes, in both regulatory and a review of fees. In my opinion, it’s long overdue.
For the average investor, the fees they pay can have a huge consequence on their overall return. The average US mutual fund fee according to Rebalance IRA is 1.27% and that equates to 29.6% of their investment return when compounded over a 10-year period. Now again I believe for the average investor they need to pay an Advisor to recommend the funds that are purchased. The average Advisor fee for accounts that are 1.23% $250,000 according to 2016 study by Investment News Research.
There are many different options being thrown around now to bring fees down that can give the average investor a chance. Most are pushing investors to doing it themselves, and as I’m sure your aware of—that can end in disaster. Some firms are creating what’s called a “Hybrid” model that allows clients to call a 1-800 number, but if they could only see the pimples on the face of the advisor they are talking to, I believe they would think twice.
What we do isn’t new, it’s just not that well known, nor do my competitors want it to be known. We manage “in-house”, portfolios of different risk tolerances, that enable us to deliver a quality product to investors for one, reasonable transparent fee. The highest fee we charge for clients to be in our models is 0.85% and that is inclusive of all trading costs and account fees. We do not purchase funds that create an additional fee, that would ultimately reduce the return to our clients. Our portfolios hold direct securities that the client can see every month.
So why is this not being done at all firms? It’s a lot of work. Managing portfolios or as I like to say managing risk, is a time-consuming job. There is a lot of research needed, and it’s much easier to send the money to ETFs or Mutual Funds to invest. Secondly (and I say this from my experience at working for one of the larger brokerage houses), I was not able to reduce my fee to this level.
I write this to you as a trusted professional to educate you on some of the major changes that are happening in our industry. I’d welcome the opportunity to meet with you personally to provide further detail.
Mick Graham, CPM®
Branch Manager
Raymond James Financial Services
This information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mick Graham and not necessarily those of RJFS or Raymond James.
In a fee based account clients pay a quarterly fee, based on the level of assets in the account, for the services of a financial advisor as part of an advisory relationship. In deciding to pay a fee rather than commissions, clients should understand that the fee may be higher than a commission alternative during periods of lower trading. Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. To the extent that clients intend to hold these securities, the internal expenses should be included when evaluating the costs of a fee-based account. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs. A list of additional considerations, as well as the fee schedule, is available in the firm’s Form ADV Part 2A as well as the client agreement.
