Do you know how much you pay for your wealth management services? Fees are not always transparent in the financial industry so it can be hard to determine unless you understand what you are looking for. There are 3 important characteristics to consider when determining the total cost of the advice you receive regarding wealth management. In this blog, I will be going over the 3 costs, how to determine them, and discuss how they might impact you on your way to achieving your financial goals. I have included some questions along the way that should give you some insight into whether your financial advisor is charging you appropriately.

Wealth Management Cost #1: Advisory Fee

If you rely on a financial advisor to manage your investments, this is the cost you pay to them. This cost may be shown on your statements, but not always. Depending on what type of account you have, you may be charged differently.

In the past, financial advisors were primarily paid through commissions. These accounts still exist today but are less common. If you have a long-term buy and hold strategy this can be a good solution, but one worry is the conflict of interest. Your financial advisor is paid when trades are placed or products are sold, not for sitting on their hands doing nothing. This can lead to unnecessary activity in your account known as “churning” to produce revenue. It can be hard to determine if your financial advisor is making a recommendation in your best interest, or if they are looking to add to their revenue.

Fee-based accounts are the solution to the conflict of interest that arises from commission accounts. Rather than being charged every time a change is made, a flat fee is applied to your account based on your assets. Fee-based accounts have become increasingly popular in wealth management as they help align financial advisors’ goals with their clients; growing your wealth. The downside? If no changes are made you still pay a fee. With that being said, many advisors do much more than managing your money. They can help you design a financial plan, answer questions you have in regards to your finances, and even help with minimizing taxes for your estate. Wealth management is much more than choosing investments. For more information, Motley Fool has a great blog discussing exactly why it may make sense to work with an advisor.

If your advisory fee is not on your statement, here are some other ways to determine:

• Yearly Statements. These disclose all fee's charged to your account. 
• Calling your Advisor. They will be able to answer this question for you. If they are dodgy, it's probably time to get a new advisor.

Questions to consider:

• Does your advisor offer advice to supplement your investments such as tax minimization or estate planning?
• Is there open communication between you and your financial advisor? Are they available when you have questions in regards to your finances?

Wealth Management Cost #2: Product Cost

This is where costs can become difficult to determine. Products are what financial advisors typically use to design your portfolio. There are hundreds of thousands of products that investors have access to with varying objectives, risks, and costs associated with them.

Investors have a choice that includes equities, bonds, derivatives, and numerous other options when making an investment. Held individually, these do not make up a portfolio. A portfolio is a collection of these investments designed to match investors' risk tolerance and their goals. To make portfolio design easier, companies have created professionally designed products such as mutual funds and ETF's which essentially bundle the primary investments I have mentioned. Financial advisors help investors choose investments that are suitable.

Designed products come with a cost that is known as the Management Expense Ratio or MER for short. This cost varies greatly depending on the product. Mutual funds tend to be more expensive than ETF's and may come with other charges that are not always clear to investors. These other charges may be front-end or back-end loaded and are on top of the annual expense.

Front-end load means that you are charged when you initially make an investment. For example; If the front end charge is 2% and you invest $10,000, your initial investment is only $9,800. These front-end charges typically go to the representative who has sold you the product.

Back-end loaded products will cost you if you decide to sell your investment before the end of your lock-up period. Some may be as high as 7% dropping by 1% each year until the lock-up period is over.

Here are a few ways to figure out your MER and other sales charges:

• Prospectus. This should be given to you when you initially invest in the product and is also required to be delivered upon request.
• Google. If you simply type in the name or ‘ticker’ of the product, you should get results from financial sites such as Yahoo! Finance that will show the MER.
• The Fund Company. If you are invested in a Fidelity mutual fund, you will be able to find it on their website. Alternatively, you can call a representative to discuss.
• Calling your Advisor. They will be able to answer this question for you. If they are dodgy, it's probably time to get a new advisor.

The last part of product cost is the Trading Expense Ratio. This cost varies from year to year and stems primarily from the activity within the fund. Transactions come with a cost, and this is spread across the investors. The TER is published on the annual mutual fund performance report.

Questions to consider:

• Is your statement cluttered with products that seem overly complex?
• Does your advisor solely provide funds from the company they work for or are they free to use products from other companies to build your portfolio?

Wealth Management Cost #3: Opportunity Cost

Opportunity cost is not as easy to identify. It is the cost of choosing one thing over another. When investing, you are presented with many choices. If you rely on a financial advisor, the first choice you will make is who that advisor is. There are many things to consider when choosing a financial advisor. What are their credentials? Do they have existing clients advocating for them? How are they compensated? What is their process and investment style? You should choose someone that you trust, has good values, and puts an effort into understanding what is important to you.

The second part of the equation in regards to opportunity cost is investment choices. Whether it’s you or your financial advisor, a choice is made on how to allocate your money. The returns that you see on your statements are after all the costs are accounted for. High costs have an impact on your returns and may be impacting your ability to reach your financial goals. At our practice, we believe in transparency regarding fees and also choosing products that offer the best price relative to performance. If someone is generating great returns, the higher cost may be justified. If two funds have relatively similar performance, you should choose the fund that has a lower associated cost. By prioritizing price relative to performance, we ensure that more money is left in your pocket at the end of the day.

Questions to consider:

• Is your advisor transparent about their compensation and the fees that they charge?
• Has your advisor taken time to educate you on their investment philosophy/ how they manage money?

Summary

Individuals seek out a financial advisor for a reason, but it is important to understand what you are paying for. Managing your own investments can be an overwhelming task and many simply do not have the time. The investment world is full of jargon, conflicting ideas, and numerous resources, and it can be tough to filter out the things that truly matter. Financial advisors dedicate their time to understand your financial picture, provide you with advice, and manage your money in a way that aligns with your financial goals. The advisor you choose should be a person that focuses on all aspects of wealth management.

If your financial advisor has not educated you on something like fees, it is up to you to understand them. If you feel like there is a possibility that you may be paying too much, please reach out. We will gladly review things with you to make sure you are on the right track to achieving your financial goals.

For more reading on how fees impact your financial goals, check out our ‘Fees Matter’ page.

If you have any questions or would like to discuss the topics mentioned in this blog, please do not hesitate to reach out here.

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