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Jeopardy contestants are challenged with delivering the question to an answer that is provided. In real life, however, posing a question is the easy part. If you work with an investment manager, one of the most important inquiries you must make relates to how much you are paying. After all, fees do chip away at your potential investment return. Here, semantics can play a very big part in the answer that you are provided. To get the answer you are really looking for, you must ask the right question…
If you have hired a professional advisor to choose investments on your behalf, then you are likely paying a “management fee.” This management fee is generally a percentage of assets managed and is most often deducted directly from the accounts. The most common fee-related question asked of investment advisors is: how much are my management fees? It’s a good question, but not the right question. If you have made this inquiry to your advisor, you can likely trust that the answer provided is the amount collected by your advisor’s firm for their investment-related services. The problem with this question is that it doesn’t tell you what you really want to know. What you need to know – and should – is how much you are paying all-in.
In order to assess the total cost of your investments (or potential cost if you are interviewing an investment advisor), we recommend asking these specific questions below:
- What is my annual management fee and how is it assessed?
- Am I paying additional fees for any other services? If so, what services, how much and how are the fees assessed?
- How much am I paying on the underlying investments? (i.e., expense ratios)
- How much am I paying in transaction costs on each type of investment (i.e., stocks, bonds, mutual funds) and who collects these commissions?
Total investment costs will vary based on a number of factors, some of which are specific to your situation and possibly out of your advisor’s full control. So, be careful when comparing your costs to those paid by others and have a discussion with your advisor about how each fee component is set. Your advisor’s value cannot be adequately assessed without a true understanding of cost.