Are you paying these fees?

June 11, 2016

 Nearly every portfolio's statements I've looked at shows fees my clients didn't know they were paying. 

 

 

 

Let's take a look at the fees that often show up and then how you can figure out what TOTAL fees that you've paid. 

 

"Assets under management" fees or "AUM."

 

EXAMPLE:

 

Your portfolio of $250,000* pays an advisor 1% per year in "Assets under management" fees, or "AUM."

 

1% of $250,000 comes to $2,500.

 

You will pay $625, or one quarter of $2,500, at the quarter's end, if you pay quarterly. (A few places charge monthly, in which case you'd divide by 12 instead of 4.) 

 

*By portfolio, I mean all of the accounts that this person is managing for you: your regular, taxable accounts, your IRA, etc.

 

Commissions: 

 

You pay your advisor when she or he buys or sells something. (And sometimes both!)

 

Sometimes this is a percentage. More commonly these days, it's a flat fee. 

 

EXAMPLE: 

 

You buy $2,000 of a mutual fund that has a 3% commission.

 

You will pay $60 to make that trade. ($60 is 3% of $2.000.)

 

Or,

 

You pay $10.95 every time you buy something in your online brokerage account. That's also technically called a commission, though usually you see it called a "trading fee."

 

The difference in my mind is that your broker or advisor receives some or all of this money, whereas with a transaction fee they don't. 

 

Commissions are also called "loads".  A "no-load" fund has no commission. A "loaded" fund does have one.

 

 

Transaction fees: 

 

You pay your custodian (e.g., Schwab, Vanguard, Fidelity, etc.) when you buy something.

 

EXAMPLE: 

 

CustodianXYZ charges you $50 to buy *any amount* of MutualFundX because it is not on their "preferred" list. 

 

Most ETFs have a transaction fee. Options always seem to have a fee "per contract." Other things you might buy, like stocks and bonds, really vary depending on what deal your broker has going on with the custodian. 

 

"Expense Ratio" 

 

Mutual funds and ETFs have "expense ratios." These are the fees that the mutual fund or ETF company charges to operate their fund. 

 

EXAMPLE: 

 

CustodianXYZ

 

Your mutual fund has a .5% expense ratio. Even though the stocks in the mutual fund made 5%,  YOUR performance return only shows you made 4.5%.

 

The $1,000 you invested would have come out to $1,050 but, in fact, you only end up with $1,045.

 

You can't see that these fees coming out- it just looks like your mutual fund did slightly less well than if you'd just added up everything inside the fund. 

 

"12b-1" fees.  

 

12b-1 fees are a percentage of those "expense ratio" fees that go back to the broker or advisor who sold you the mutual fund. Not all mutual funds do this, and you won't see these fees because they come out behind the scenes. 

 

Other fees:  

 

The fees I listed here are the most common fees I see, but of course there are others and there are a lot of fees that you can't see.  Mutual funds in particular are notorious for internal trading fees that they aren't required to disclose. 

 

In general, TANSTAAFL*.   *There's No Such Thing As A Free Lunch. Shout out to Heinlein's The Moon is a Harsh Mistress for introducing me to that acronym.)

 

If your mutual fund is a "no-load", "no transaction fee" fund, where do you think the custodian is getting it's money? No, it's not doing it out of love. It probably made a deal involving the mutual fund's internal trading fees or something, which don't have to be disclosed. See also: Soft dollar arrangements.

 

*There's No Such Thing As A Free Lunch. Shout out to Heinlein's The Moon is a Harsh Mistress for introducing me to that acronym.

 

  • Paper statement fees.

  • Margin fees (when you have to borrow money from the custodian. This happens on purpose sometimes and by accident other times. An example of how it happens by accident would be if you placed an order buy 10 shares of PrettyGoodStock but it turns out they sold for $20.50 instead of $19 per share, and you didn't have quite enough cash in your account. 

  • Hmm. What am I missing? 

 

How angry should I be about all these fees? 

 

People should be paid for their work- yes, even brokers. (That was a little financial humor.) Fees are how this happens. I don't have a problem with fees. 

 

...However...

 

1)   You should know what you're paying. You should get a breakdown every year of ALL the fees that all of your accounts paid out.

 

You won't be able to see the mutual fund or ETF expense ratio fees because they aren't fees that your accounts paid out- they're money that never arrived in the first place, so give your advisor or broker a break on that.

 

I have never seen this done, but I strongly hold that brokers and advisors should disclose each current holding's expense ratio. They are required by law to tell you when they first buy it, but generally this notification is in the form of a bazillion page prospectus in 8 point font that is emailed to you. It's a rare client that bothers with that! (If you wanted to be that involved, you wouldn't have hired someone to begin with.)

 

 

2)   I, personally, don't think people should be paying all of the above all at once, except in specific, exceptional circumstance, that the advisor explains each and every time. 

 

For instance, if you are paying your advisor 1% per year, AND a $10 commission* (and/or trading fees) every time she or he buys something, AND you're getting dinged .87% in a mutual fund expense ratio? I don't like that at all, no sirree.  

 

If your advisor does such a smashing job that he or she is providing excellent returns on a regular basis? Great! They've earned all those fees! But realize that he or she is severely handicapped, and it's an impressive advisor or broker who can beat such a severe handicap year after year.  

 

* In fact, the idea behind the "Assets Under Management" fee structure was to take away the incentive to buy and sell things needlessly. Sometimes the best course of action is to do nothing! But if she only gets paid when she makes trades, why would she NOT want to make enough trades to keep her lights on? 

 

 

How do I find out what I'm paying?

 

My first suggestion is to look at your statement rather than the reports that your broker or advisor gives you each quarter or each month. The reports typically show the fees that the advisor took but often don't include any of these other fees. 

 

Most statements have a section on the first page that shows how much money you had at the start of the month, how much you had at the end of the month, and how much money left the account. There is usually a section for "deposits and withdrawals" which sometimes includes your advisor's fees, and then a separate section for "fees and charges".

 

Another place that fees get disclosed is on the document that is attached to the 1099 that you receive at the end of each year for each account.

 

 

Still confused? Want help looking over your statements? Call me up or drop me an email!

(510) 323-3973

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