Individuals seeking financial advice from advisors should fully understand the fees associated with the management of their money. That can only be understood by asking the advisor how the portfolio is constructed, whats in it and whether the advisor manages the money or outsources its management to another firm. Each can determine TOTAL annual fees (AUM Fees pus Fund Fees) charged by your account. Certain fees may not be disclosed even if asked upon initial engagement of an advisor since the actual portfolio composition has not been determined.
ASSET MANAGEMENT FEES. Broadly speaking the trend towards fees associated with money management has been going towards fees based on Assets Under Management (AUM) vs commission. This has been especially true since commissions on stock trading through many of the electronic brokers is now zero. The AUM fees by regulation are disclosed through a Investment Agreement provided by the advisor that is signed by the client. Fees can range from under 1% to 2% annually. Some advisors can charge a flat fee per account, but this is not the norm.
FUND FEES. On top of the AUM fees charged by the advisor there are fees associated with the underlying assets that are used in the portfolio construction. This largely depends on the style of management used to manage client money. If an advisor uses Mutual Funds or third-party managers to manage your money that may result in much higher fund fees annually. Mutual Funds can have annual management fees, upfront Load Fees and/or 12b-1 Fees associated with marketing the fund. ETFs (Exchange Trades Funds) are bundles of stocks that are often used in portfolio construction that may have much lower fund fees. Utilizing individual stocks or even bonds do not carry fees associated with them. It should be noted that advisors can use model portfolios designed by a third-party that carry fees with them as well. The method of portfolio composition and method of money management may determine not only cost but performance net of fees.
TRADING FEES. Besides the Fees mentioned above some advisors depending on who they use as their custodian (the firm that you account actually resides) charge trading fees to client portfolios as they change. These amounts maybe dependent on the charges per trade and frequency of trading. Trading fees, can be avoided, depending on the custodian used by the advisor. Recently, the electronic brokers have moved to commission free trading.
In the end, armed with more information regarding the underlying fees tied to managing your money, hopefully you can make a more informed choice when selecting an advisor.
At Brecken Capital Advisors we actively manage clients assets through the use of 7 proprietary model portfolios designed to match each client's risk tolerance with our views of the market & economy. We use a combination of ETFs and individual stocks with TD Ameritrade Insitutional as our custodian who does not charge trading fees. Additionally, we transparently measure both cost & performance for our clients. For more insights see our website and disclosures found there at BCA.
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