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Do You Really Know What You Are Paying Your Advisor?

Even many price-savvy shoppers miss the boat when it comes to understanding the cost of their investments.

There is a major difference between price, cost, and value.  This blog will focus on price vs. cost.

There is a big difference between “price” and “cost”. 

“Price” is just advertising – it is only a part of what you are really paying.

Advisors can advertise cheap fees – but they can make money off you in plenty of other ways, such as:

• Using their own firm’s proprietary funds (and making more money)
• Investing your account in stock deals sponsored by their own firm (and getting rewarded with extra compensation)
• High commission products (annuities, REITs, alternatives)

Think of the cheap plastic 2-liter soft drink specials advertised by supermarkets.

Supermarkets advertise “cheap Coke” as “on sale” to get you into the store.  Yet, the supermarket still makes money on you!  When you come inside and buy other, more expensive products, the supermarket still wins.

“Price” is only what you see coming out of your account.

Other money might be coming out of your account, but you just do not realize it. 

Why do people have problems with credit cards?  Isn’t it easier and more tempting to spend money by swiping a card than it is to physically lay out the cash for the cashier?  Yet, you still pay money in both instances.

“Cost” is what you actually pay.  Let’s find out what is included in cost:

Cost Type	Fee-Only Advisors (Ambassador Wealth Management)	Industry Practices Including Large Brokerage Firms
Advisory Fees	Based on client relationship Paid to advisor	Based on client relationship Paid to advisor
Trading Costs	Variable (per trade) Paid to the custodian bank Not paid to advisor	EITHER: Variable (per trade), paid to custodian bank, not paid to advisor OR: Annual fee for unlimited trades paid to advisor
Expense Ratios for Fund Companies	Not paid to advisor Expense varies Expense charged off-net performance and paid to fund company	Not paid to advisor Expense varies Expense charged off net performance and paid to fund company
Back-end advisor compensation	NA	Paid to advisor: Trails from insurance companies Revenue override/bonuses from broker-dealers Marketing 12b-1 fees from mutual funds
Commissions	NA	Paid to advisor Amount varies
Account Fees	Varies by custodian (none at TD Ameritrade, Ambassador’s custodian bank) Not paid to advisor Examples: annual fees on IRA’s, small accounts If charged, paid to custodian bank	Varies by custodian Not paid to advisor Examples: annual fees on IRA’s, small accounts If charged, paid to custodian bank

1. Advisory Fees

   Advisors often advertise their advisory fees as their “price”.  Depending on what type of advisor you are considering, that may or may not be the full “price” they will charge you.

   Fee-only advisors like us charge only 2 types of advisory fees directly to clients:

   • Management fees (quarterly and assessed directly from investments managed or advised by the advisor)
   • Consulting fees (billed only for projects and plans you request, typically on an hourly basis)

   As we will see later, advisors who are not “fee-only” can charge you money in other ways.

2. Trading Costs

   Whenever you request to take money out, invest money, or the advisor decides to reallocate your account, you incur trading charges.

   Some advisors (or their firms) charge you an additional annual fee for trading regardless of how much, or if, your account is traded or not!

   Our approach is different.  We do not receive any money for the amount of trades you make. (If your account has no need to trade at all, you pay no trading commissions.) You only pay to our custodian bank TD Ameritrade on whatever trades are made during the year.  We believe this better serves our clients in several ways:

   • Reduces the risk of conflict of interest – advisors who charge annual trading fees face a potential temptation not to trade your account as often as they should and make more money off you by not trading.
   • You only pay for the trades you need.
     • We believe it keeps costs down for you.
     • While our general philosophy is to trade sparingly, in the event your accounts require trading, it gives us flexibility to trade them as necessary.
     • For trades in certain investments, your costs might be less (or cost you nothing in some cases) compared to what you might otherwise have paid at other custodians.

3. Expense Ratios for Fund Companies

   Depending on how your accounts are invested, you might be paying expense ratios on pooled investment vehicles (examples: mutual funds, ETFs, other exchange traded products).

   For investors in managed accounts, they might incur an additional direct management fee paid to the manager (not the advisor).

   Pooled investment vehicles like mutual funds and ETFs charge investors an expense ratio.  The expense ratio is an annualized figure that is deducted from the daily performance of the underlying fund positions.  This expense ratio goes toward paying the manager or sponsor running the fund.

   While individual stocks and bonds in theory are a cheaper way to invest than funds and ETFs, many investors end up assuming greater risk and give up diversification benefits that a pooled vehicle can offer.  Larger investors might benefit from individual holdings because they can buy more positions and diversify.

   While pooled investment vehicles incur additional cost versus individual holdings, they can offer advantages that might offset the cost.  Access to certain asset classes (international equities and bonds) in which most US investors cannot invest directly and lower single position risk (more diversification benefits) are two examples.

   ETFs tend to have lower expense ratios than mutual funds.  In some situations, mutual funds offer more benefits than ETFs.  At Ambassador, we use both types of vehicles in many of our investments.

4. Back-end Compensation for Advisors

   Fee-only advisors such as Ambassador Wealth Management receive no outside compensation.

   However, other advisors can and do find other ways to profit off of your investments.  Indeed, unless you investigate carefully, you might never know about them.  You will not see them on your quarterly statements.

   Some ways these other advisors can get paid by you include:

   • Additional annual fees from mutual fund companies they invest client money with (12b-1 fees)
   • Additional annual trailing fees from products advisors sell their clients (annuities, REITs, other products)
   • Commission overrides/bonuses for hitting revenue targets set by broker-dealers for whom the advisor works

5. Commissions for Advisors

   Fee-only advisors such as Ambassador Wealth Management receive no commissions.

   However, other advisors can receive commissions on products they have sold you.

   Examples of products from which other advisors might profit from you include:

   • Annuities
   • Non-Traded REITs
   • Illiquid Alternatives

6. Account Fees Charged by Custodians

   Ambassador Wealth Management receives no additional account fees.  Neither does our custodian bank, TD Ameritrade, charge additional account fees.

   That may or may not be the case depending on the custodian with which your advisor does business.

 

We value transparent relationships. How about you?