What are my Investment Management Fees?

If you’ve ever had an account with a brokerage firm perhaps you’ve have asked yourself this….

“What am I paying?”

You certainly don’t ask that question at the gas pump… the price is advertised on large screens many feet above the station. You probably wouldn’t say that about groceries, as the price is located next to the item. It’s not that extra fees or taxes or even conflicts of interest are absent in these two examples; they do exist. However, the difference is that they clearly disclose the end price to the consumer.

So why aren’t investment management fees as obvious?

Investment management fees

One could speculate that investment managers are attempting to hide somethingMutual fund companies pay thousands of dollars to broker-dealers in order to sit on their managed accounts platforms. This pay to play model is not unique, but, unlike the examples of groceries or gasoline, investment companies attempt to hide the total fee the client pays. Most clients are told that they pay a percentage of their assets to their broker. This isn’t forthright, as mutual fund fees are often layered on top of this. For example, a client with a 1% asset management fee and a .50% mutual fund fee roughly pays a total of 1.5% annually. The additional .50% is deducted from the client’s investments. To illustrate the point, 1.5% is $15,000 on $1M per year.

Another example of the lack of fee transparency is with discretionary bond portfolios. Many brokers use commission products such as annuities, REITs, or structured products, which require clients to sign applications. Some, however, buy individual bonds for their clients. This practice isn’t inherently bad it often results in undisclosed commissions that can be as high as 2%. As a result, in May of 2018 the SEC will begin to enforce the markup rule, whereby all bond purchases must disclose the commission and/or markup on the bond.

Commission products have seen sales of REITs and annuities for example plummet as both transparency and a push by the Department of Labor on brokers to disclose fees make the commission easily available. As a result, REITs have now morphed into liquid real estate funds and annuities are moving to a fee-based platform. Unfortunately, fees are not fully disclosed.

Would anyone ever just buy groceries, order a meal, or even buy a car without knowing the price? However, millions of investors do just this annually. This of course begs the question, what is it the middleman (or woman) is doing for them?

The proliferation of technology-based solutions has ushered in new levels of transparency that were sorely lacking. With it, those brokers relying on opaque fee structures are finding it harder and harder to keep up the lie. What’s left after sanity is introduced is more objective advice from your financial advisor.

This makes the purchase of investment advice more like groceries or gasoline after all.