{"id":6406,"date":"2013-05-22T11:42:20","date_gmt":"2013-05-22T18:42:20","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=6406"},"modified":"2016-12-21T07:30:37","modified_gmt":"2016-12-21T15:30:37","slug":"three-critical-questions-about-adviser-fees","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/three-critical-questions-about-adviser-fees\/","title":{"rendered":"Three Critical Questions About Adviser Fees"},"content":{"rendered":"

Retirement savers have a lot on their plate these days. A long, slow recovery is making it harder to believe in stocks even as they hit new highs. Meanwhile, bond yields are low, in some cases negative after inflation.<\/p>\n

Tax laws are changing, government is deadlocked over the debt and there seems to be no safe place to turn, on or off Wall Street.<\/p>\n

To top it all, there’s the growing discussion on the matter of adviser fees. When markets zoomed upward reliably in double-digits, few seemed to care what they paid money managers in adviser fees.\u00a0Now, every penny counts<\/a>.<\/p>\n

\"adviser<\/a><\/p>\n

One big-wheel wealth management firm is coming completely clean on adviser fees, detailing their strategy of telling the painful truth in a\u00a0fascinating article<\/a>\u00a0in\u00a0The New York Times<\/em>. They say that their firm reveals the actual dollar cost of management on an annual basis.<\/p>\n

“By expressing it in dollars, that makes a real impact on clients,” one manager at the firm told the newspaper. “Most advisers talk in percentages or, worse, basis points, and no one knows what a basis point is.”<\/p>\n

He’s got the right idea: People saving for retirement, whether they have $40,000 or $4 million, really\u00a0don’t understand how they are charged, why and when<\/a>. So let’s break adviser fees\u00a0down.<\/p>\n

1. How you are charged.<\/strong>\u00a0Most money managers talk in “basis points” because it’s the language of finance. A simple synonym for basis point, one which might make more sense to ordinary people, is “a tiny fraction of 1 percent.”<\/p>\n

Take 1% and cut it into 100 pieces. Each of those tiny pieces is a basis point. So, 100 basis points is 1% while 50 basis points equals 0.5%. On a $100,000 investment then, a 50 basis point fee comes to $500 per year.<\/p>\n

Easy, right? Except people often don’t understand the whole picture on adviser fees, which involves adding up charges from several directions. The manager might be charging you 1%, but the underlying funds he or she buys on your behalf could easily be charging another 2% for that portion of your money,\u00a0obscuring a rock under which lives another nest of poorly explained fees<\/a>.<\/p>\n

Key questions to ask:<\/strong>\u00a0Tell your manager to add up all the fees on your account. If you don’t have an account yet, ask for a breakdown and total on fees for a sample account. Get it in dollars per year for a given balance, say, $100,000 or $1 million, any number that helps you make an apples-to-apples comparison.<\/p>\n

2. Why you are charged.<\/strong>\u00a0Money managers have to eat, of course. But there’s no good reason to buy the most expensive fund on the market in order to achieve a simple outcome. If you have an actively managed fund in your portfolio whose purpose is to\u00a0“beat the benchmark return” of some well-known index<\/a>, does it? And does it beat the benchmark after subtracting the fund’s fees?<\/p>\n

You might want to know why your manager owns this fund, if it can’t achieve its stated goal with any consistency. In comparison, index funds and exchange-traded funds won’t beat their benchmarks. But they won’t lag by much, either, given their tiny fees.<\/p>\n

Key questions to ask:<\/strong>\u00a0Why are the funds I own worth the adviser fees\u00a0I clearly pay to own them? Do you benefit from buying them on my behalf? Are there efficient alternatives?<\/p>\n

3. When you are charged.<\/strong>\u00a0Finally, you have to consider the impact of trading commissions. Getting in and out of individual stocks can be pretty cheap in a tax-sheltered retirement account, but\u00a0if your manager does it daily, well, that adds up<\/a>. He doesn’t pay for the trading, you do.<\/p>\n

Likewise, mutual funds cost a flat amount to trade, generally higher. If your manager is trading in and out of mutual funds as if they were stocks, that’s a serious cost burden for you.<\/p>\n

Key questions to ask:<\/strong>\u00a0Are you compensated when a commission is generated? What is the “turnover” (a measure of trading frequency) of your average portfolio under management?<\/p>\n

Your adviser fees cheat sheet<\/h2>\n

Here’s your cheat sheet. The correct answers to the above for\u00a0long-term\u00a0retirement investors should be:<\/p>\n

1. Adviser fees of less than 1%, all in.<\/p>\n

2. You own the least expensive, most passive funds.<\/p>\n

3. We receive nothing for trading your account and do so only when absolutely necessary\u00a0to\u00a0rebalance.<\/p>\n","protected":false},"excerpt":{"rendered":"

Retirement savers have a lot on their plate these days. A long, slow recovery is making it harder to believe in stocks even as they hit new highs. Meanwhile, bond … Read more →<\/span><\/a><\/p>\n","protected":false},"author":8,"featured_media":6419,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_wp_rev_ctl_limit":""},"categories":[3],"tags":[],"yoast_head":"\nThree Critical Questions About Adviser Fees | MarketRiders.com<\/title>\n<meta name=\"description\" content=\"When markets zoomed upward reliably in double-digits, few seemed to care what they paid money managers in adviser fees. 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