Making Sense of Advisor Fees

      One of the most common questions we get when potential new clients are interviewing us is "what are your fees." A fairly straight forward question on the surface, right? Not so fast. For such a generic question that should yield a simple response, the financial services industry has done a fantastic job making the answer to that question more difficult than it should be. All too often, depending on the recommendation, the advisor themselves may not know exactly what all the fees are within an investments. Even worse than that sometimes they truly do believe they know only to find out later they were mistaken. One of our goals at Veritas Wealth Management LLC is to help educate the general public on topics such as this to help them navigate the constantly changing world of financial services. Even more important to us is to not just give you the answer as it applies today but give you the tools necessary to find the information on your own as it changes.
​       I can vividly remember like it was yesterday, I was home for Thanksgiving back in New York, my first one back home since I had made the move the Charleston. I was sitting on the couch with my former step father watching football and talking about the usual topics when we started talking about work. I had recently took his advice and started my career in the financial services industry with New York Life Insurance Co. on Meeting St. in downtown Charleston. I did so largely because of him, after all at the time he was and still is, a VP for Morgan Stanley.  We started talking about all of the different paths that one can take when attempting to start a career of giving strangers financial advice and believe me the options are seemingly endless. My stepfather had been pressing pretty hard to have me take a position at Morgan Stanley because of the opportunity I would immediately have because of the work he had done. I wasn't interested but that is a story for a different day. My stepfather was and still is an asset manager, meaning he is compensated a percentage fee for the money that he manages. The reason this particular conversation stands out in my memory is because of how high I perceived that fee was.  He actually went on to tell me about how his office tracks which advisors revenue the highest fees based on a percentage of their assets. Meaning  there was an award if one advisor managed to charge his clients on average a fee of say 2.5% vs his office average of 2.0%. Can you believe that? That notion of rewarding higher fees made me uncomfortable then and now with close to a decade of experience that uncomfortable feeling has morphed into downright anger. 
​      The anger stems from understanding that there are very few things that advisors have actual control over when it comes to managing your money so they really have to excel at those things. The things advisors can actually control are: 

​                    1) How much we expose your account to taxes
​                    2) How much general risk we expose your assets to
​                    3) How much we charge in fees

​       The first two are fairly well regulated. For example tax exposure inside of a retirement account is non-existent until withdraws are taken. How much risk your account is exposed to is generally determined by a standard risk tolerance questionnaire to determine the amount of stock and bonds a client owns. However, the third one, the fees advisors charge is more like the wild west with the differences between advisors being greater than one may believe. What's even worse is that some companies don't necessarily disclose that information and instead allow each individual advisor to make their own fee schedule. For example, I use to own a Voya franchise on Broad St. in Charleston and at my office we had a completely different fee structure than the Voya office in North Charleston and Mt. Pleasant. This makes finding fee information more difficult. You, the client, undoubtedly signed an agreement at one point but years later do you really remember what those fees are? Did you even pay attention when you were signing off on fees? Are you aware of what the range in fees are and the effect they have on the growth of your portfolio? While we can't answer the first two questions we can at least give insight on the last question. 

​       For the purposes of this post I will focus solely on a standard Managed Account, one were you have an old IRA invested in stocks, bonds, mutual funds or ETFs. We will tackle the topic of things like Annuities and Life Insurance at a later date.

Is There a "Standard" Fee?

       ​The quick answer is no. For a long time the "standard" fee in the industry has been closer to 2% meaning on an account of $100,000 the client would be charged $2,000/year. So if a client's investments experienced a 10% gain the client's account would only see a net gain of $7,800. ( $100,000 + 10% = $110,000 - 2% fee of $2,200 = Net $107,800) However things have been changing in the financial services industry and just like other industries such as Retail, competition is increasing forcing the average fees down. More competition = lower fees. There have also been advisor such as myself or say Vanguard that have been bold enough to challenge the status quo. One such company called Personal Capital has managed to compile a large enough sample size to, in my opinion, adequately compare a number of different firms. For example they have found that on accounts between $100,000 - $1,000,000 The average account fees for each company are as follows:

Firm	Program	Fee %
Ameriprise	Manage Accounts & Financial Planning	1.75 - 3.00
UBS	Portfolio Management Services	2.50
Morgan Stanley	Select UMA	2.00 - 2.50
Wells Fargo	Private Investment Management	1.50 - 2.00
Merrill Lynch	Personal Investment Advisory	1.00 - 2.00
JP Morgan	Mutual Fund Advisory Portfolio	1.15 - 1.45
Edward Jones	Unified Managed Account Model	1.25 - 1.35
Charles Schwab	Schwab Intelligent Advisory	.28
Vanguard	Personal Advisor Services	.30

       So how can there be such a large difference between the high side of Ameriprise's 3.00% and the low side of Charles Schwab's .28%? The answer to that question comes down to what you, the client, is looking for. The lowest two firms, Charles Schwab and Vanguard, generally offer advice and portfolios comprised of their own proprietary mutual funds and ETFs. Both also see portfolio management as a secondary revenue source behind their brokerage business. Both will also have limited contact to an actual human that you can look in the eye or shake their hand. On the other side we have the rest of the firms that offer the human touch certain client's are looking for along with an open architecture strategy that allows its advisors to recommend funds or securities regardless of their name. It is fairly common with these firms to have several different fund families such as Fidelity, Oppenheimer, American Funds, iShares or T. Row Price etc. Is that human interaction worth the increase in fees? Mathematically speaking there are far too many variables to answer that question from a numbers stand point so really the answer comes down to the value you, the client, places on that advisor/client relationship.

​Where Can I Find Fees From Different Advisors?

       ​All advisors and firms that are registered as Registered Investment Advisors, are required to file a Wrap Fee Brochure with the SEC. In this brochure you will find a breakdown of their fees. In some instances the fees will not be as obvious, for example Voya, does not have an explicit breakdown because it largely depends on the individual franchise owner. In cases such as this you can:

                    1) Request a copy of the fee disclosure you signed when you opened the account
​                    2) Look at your statements and find the itemized fee, multiple by frequency then divide by value
​                    3) Contact us and we will calculate for you
​       
​       Personal Capital was kind enough to provide each of the firms Wrap Fee Brochures at the bottom of their study, which again I have attached a link to at the bottom of this post.

​Why Do Fees Matter So Much?

​       ​As we previously discussed advisor can really only control 3 things about your account. Only fees are a steady constant headwind to portfolio growth. Taxes may go up or down and your appetite for risk may also decrease or increase as time goes on and goals change. However one thing that will never change is the fact that you will be paying fees. Since fees are the only constant they have the unique feature of always being a drag on your portfolio growth. Their effect can be dramatic and at times goes unnoticed. Let's take a look at an example:

                                                           ​Client "A" account size $100,000 with 6% growth for 20 years

Firm	Fee %	Total Fees $	End Value
Edward Jones	1.35	$45,218	$244,376
Veritas Wealth Management	.875	$30,905	$269,018
Morgan Stanley	2.00	$62,349	$214,111

       It is important to note here that should your actual rate of return differ from the one illustrated above the difference in fees would change as well. If your rate of return was higher, say 8%, the difference in fees would be much greater. In contrast should your rate of return be less, say 4%, the difference in fees would be less.
​       In order for the client to experience the same end result an advisor from Edward Jones, under these conditions, would have to outperform an advisor from Veritas Wealth Management by .51% annually and Morgan Stanley would have to outperform Veritas Wealth Management by 1.21% annually. The probability of that happening has many variables and is ultimately up to you, the client, to decided if that is very likely or not.

Conclusion

    The question really comes down to what type of investor are you? Do you value having an advisor that you can establish a relationship with or do you just want an algorithm (computer) making your investment choices for you? Do you have to choose?
​       This is the only place you will see us "advertise" ourselves. We don't believe you should have to choose between working with an actual personal advisor or lower fees. We do not, nor do we plan on, ever having clients simply placed into a computer program and live with whatever that outcome is. We believe our fees, found under the Portfolio Management tab, reflect our commitment to challenge the higher fees of our personal competitors while remaining competitive with our computer driven counterparts. 

​Personal Capital Study can be found ​HERE