The Importance of Knowing Your Fees

Written by: Anthony Striker, MBA – Senior Wealth Manager

This month I want to talk all about fees and account or investment costs. When working with a financial advisor, or even when self-managing an account, it is imperative to know what costs are associated with that account, investment, or overall plan. Here at Wheelhouse, we are transparent with the fees that our clients are billed, as well as any other costs they may be faced with that are not payable to Wheelhouse. We want to make sure that our clients and potential clients are as educated as possible when it comes to what they are paying. Only then can you begin to ask yourself “Am I getting value worth or equivalent to the hard-earned dollars I am paying?”

When most investors think about fees associated with a financial advisor or other financial planning program, they think about management fees. However, there are other fees associated with investments or investment products that investors may have to “dig” for. In general, there are three types of potential fees an investor should be aware of:

• Management fees. These are the fees deducted from your account on a monthly, quarterly, or annual basis depending on your advisor’s billing structure. Here at Wheelhouse we bill on a quarterly basis. These costs go to the company managing your accounts and your direct advisor is often compensated with a portion of that amount. According to Nerdwallet, the average management fee for a “robo-advisor” is 0.25%-0.5%. These often come with portfolios that are pre-built or managed and monitored with computer algorithms. Customized financial plans, face-to-face, or even phone communication do not often come with these types of programs.

For a face-to-face financial advisor, the average management fee is around 1%. In our opinion, for this type of cost it is important to make sure that you are getting customized, tailored financial plans for your specific situation.

• Transactional costs. These are fees that are paid to a Registered Representative or a brokerage firm for investments bought or sold on your behalf. The average cost to a client for transactional costs are 1%-2%. This means that if a $50,000 trade is placed and you are working with a Registered Representative who charges a 1% transaction fee, $500 will be deducted from your account to make the trade.            

Fiduciary advisory firms earn fees based on providing advice and not transaction services, this fee structure prevents the possibility of trading in excess to earn commissions, which is known as “churning an account”.  Furthering our duty as fiduciaries, we choose to use Charles Schwab as our custodian (Previously TD Ameritrade), as they offer low cost investing, or in other words many of their investments do not have any ticket charges which would typically be passed down to you, the client.  An advisory firm will make more if a client’s account performs better, as opposed to a transactional cost that has no connection to how the account performs. Some mutual funds also have transactional costs to get into a fund, which is often called a “load”.  

• Internal investment costs. These are costs that are often ongoing as an investor holds a particular investment. One example of this is an expense ratio in a mutual fund or exchange-traded fund (ETF). For instance, a mutual fund may earn 10% over a one-year period, but if its internal cost or expense ratio is 1%, you will see a 9% return from that investment on your statement. It often takes a bit of “digging” to uncover these types of costs through a third party such as Morningstar.com or the actual investment’s website or literature. In general, mutual funds have higher internal expenses than ETFs. According to Investopedia, the average active mutual fund expense ratio was 0.66% in 2023, compared with the average index ETF expense ratio of 0.16%. Simplifying a portfolio with a focus of passive ETFs versus active Mutual Funds may be a way to save a good deal of money in the long run on investments. Of course, it is important to make sure that whether your investments cost are 0.01% or 5% per year, you are invested in products that make sense for your overall plan. Annuities, specifically variable and income-focused annuities, often have internal costs as well. These can potentially erode returns over time if riders are added on to an insurance contract at the time of purchase.

The bottom line is that just as we pay attention to the cost of our gas, groceries, and other purchases, we should also be paying attention to the costs within our investments and retirement plans, and even go a step further to make sure that we are getting the value out of those plans that match or beat the fee(s) being paid. I will leave you with one quote from Rishi and one quote from myself on fees:

Rishi: “One way to potentially boost your rate of return without taking any extra risk is to lower your fees in your portfolio.”

Anthony: “One of our goals at Wheelhouse is to make sure that you get more value from our planning than you will ever pay in a fee”.

Have a great October! – Anthony Striker