Watch out for undisclosed fees from financial advisers

FRIDAY, JULY 8: When it comes to your investment selection; there are fees associated with all investments — some may be transparent and others may be hidden.

In the business of wealth management, fees are always up for discussion.

Types of fees and charges

Financial Adviser Fees

Financial advisers may charge a flat ‘fee-for-service’, which means that the upfront cost of advice can be higher.

Other advisers may charge a commission, usually calculated as a percentage of investments you make through them.

Depending on the size of your investment, you may be able to get a reduced fee for the size of your total investment.

The fiduciary responsibility of all financial advisers is to disclose how they are compensated; is it salary, commission or both? 

You should be informed of instances where your financial adviser is receiving additional compensation from the issuers of financial products or investments recommended.

You should also take into account the fees for the management of the account, commissions or other benefits, in evaluating whether the advice you receive is impartial. Fees and commissions can vary, so do your homework.

Product fees

Product issuers charge for manufacturing and administering their product, for example, a mutual fund.

The mutual fund issuers must disclose information about fees associated with the product or investment.

Note that a prospectus or offering memorandum must be available to you when you subscribe to the investments; it can be either paper based or electronic form.

Fund Manager Fees

Fund managers charge a fee for the management of your funds, usually a percentage of your total investment.

Some funds also charge a performance fee if the fund outperforms a specified benchmark.

Stockbroking Fees

Stockbrokers charge a fee, known as ‘brokerage’, for executing the purchase or sale of shares.

It may be charged as a flat fee or a percentage of the value of the trade. Types of brokerage companies can vary.

You will pay less for an execution-only service than if you require advice from the broker. The lowest rates of all are usually those offered by online broking services.

Wrap fees

Wrap accounts combine all your investments into one account. This can make managing your portfolio easier as you can buy and sell all your investments through the one manager, regardless of who ultimately provides the investment. A wrap account typically includes cash, shares and managed funds.

The benefit of a wrap account is that your investments are consolidated under one manager, thereby reducing the amount of administration on individual investments.

However, wrap accounts charge fees, so you must balance the cost of the wrap against the convenience of consolidating your investments.

Ways to reduce fees

Indexing

Instead of buying actively-managed mutual funds that typically charge higher fees, go with index funds instead.

They are passive and track a stock benchmark so there is no mutual fund manager pulling down a big salary for his or her supposed stock-picking success.

Index funds have in the past outperformed actively-managed funds. The main reason is the costs of active management can weigh down performance. Investors can choose index mutual funds, or save more by switching to exchange-traded funds or ETFs.

ETF – Exchange-Traded Funds

ETFs are a security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. 

By owning an ETF, you get the diversification of an index fund and can purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund.

The cost of investing will always be up for debate; you are going to always have investors who focus more on the transaction cost than the actual investment, and investors who see value in using a professional to manage and grow their investment portfolio.

Carla Seely is a Senior Wealth Manager at AFL Investments. Contact 294-5712/cseely@aflinvestments.