Quick. How much do you pay in investment fees? If you do not know, you are probably in the majority. But it is not your fault, you are busy with work and family. And if you have an investment adviser, he or she probably does not make it easy for you to know what you are paying — maybe by design. That is exactly what Andrea Fuller, an investigative reporter for The Wall Street Journal, found out when she tried to figure out how much she was paying in investment fees.
But no worries, I put together the following 5-step program you can use to learn how much you pay in investment fees. But before I get to the first step, we first have to define what we are looking for. There are three primary types of fees that you are paying when you use a financial adviser:
Investment Advisory Fees — these fees are associated with fee-based advisors and are based on the total value of the assets managed by your adviser. These fees are usually quoted as an annual percentage of assets under management, but are charged either monthly or quarterly on a prorated basis. Note that commission-based advisers do not charge advisory fees.
Trading Fees — these are fees associated with the purchase of a mutual fund,1 exchange-traded fund (ETF), individual stock, and individual bond. Trading fees are the primary method by which commission-based advisers are paid for their services. You may also incur trading fees with a fee-based adviser, such as AlphaGlider, but these fees are normally small (e.g. $5-25 per trade) and paid directly to the custodian of your assets to compensate them for their services (e.g. trading and custody of your shares, generating monthly statements and tax statements). Sometimes trades are "free" with fee-based advisers, but this usually indicates that the custodian is being indirectly compensated out of fund management fees and/or advisory fees.
Fund Management Fees — these fees are associated with mutual funds and ETFs, and are paid directly to the company that manages these funds. These fees are quoted as an annual percentage of each fund's value (sometimes referred to as an expense ratio) and deducted daily from the price of the fund — thus the fee is "invisible" to you. Some mutual funds also have front- and/or back-end load fees, which are commissions on the purchase (front-end) and sale (back-end) of the fund. Although collected by the company which manages the fund, load fees are usually shared with your adviser, in a so-called "under-the-table," or "back-door" payments.
OK, with that out of the way, here are the five steps that you can take to learn what you are paying in investment fees:
5 STEPS TO LEARN HOW MUCH YOU PAY IN INVESTMENT FEES
Ask your adviser. Maybe your adviser will be a lot more transparent and forthcoming about what you are paying than was the adviser of the WSJ's Ms. Fuller. Ask about each of the three types of investment fees listed above and if they or their employer receives payments from any of the companies that manage your funds. Have them show you where these fees appear on your investment statement. But even if you get a clear, prompt response, I would double-check the information against some of my other steps. After all, Ms. Fuller got some misinformation from her adviser before eventually arriving at the truth.
Investment Advisory Fees — review your year-end investment advisory statement. This can be easier said than done. Start by looking at the section in the statement that shows the various effects on the value of your account over the time periods in question. Below is one such example from a Big Four broker-dealer/wirehouse firm. Although it does not explicitly list the advisory fee, it does say that it is included in the "Credits" and "Debits" lines and to refer to the "Activity" section for details.
As it turns out, the statement does not actually have an "Activities" section, but it does have a "Cash Flow" section which is probably what the statement intended to refer to (see below). Here we learn that the $3,430.50 in "Credits" was funds deposited by the client, leaving the $7,408.58 outflow in the "Other Debits" line to likely be the advisory fee paid for the year. This amounts to about 1.7% of the value of the account throughout the year (approximately $430,000 as shown above), a high level but not unusual for a Big Four broker-dealer/wirehouse.
Below is how AlphaGlider breaks out "Activity" in its statement. We show the various effects in greater detail, including breaking out the advisory fee onto its own line. We strive to be as transparent as possible with our clients.
Note that I specified a year-end statement for review, the reason being that it captures the full year of advisory fees paid. If you know the frequency and timing of your advisory fee payments, you could also use a statement from another time period and then gross it up to a full year accordingly. For example, you may have a statement ending June 30, and you know you pay your advisory fee quarterly, so you could double the year-to-date fees to arrive at a ballpark estimate of what you pay in a full year.
Trade Fees — review your year-end investment advisory statement. As mentioned above, there are two main types of trade fees, one to compensate commission-based advisors for their services, and one to compensate the custodian for their services in a fee-based advisory relationship.
Below is an example of a trade fee from a commission-based Big Four broker-dealer/wirehouse. Like with the broker-dealer's advisory fee in the above example, the trade fee is not readily visible. The statement gives the quantity of shares purchased, the purchase price for each of these shares, and the total cost of the transaction, but it does not specifically disclose the trade fee component. One must back out the trade fee by subtracting the value of the shares purchased ("Quantity" x "Price") from the "Amount" value, which I have done in red. The undisclosed $438.30 trade fee amounts to 1.5% of the value of the shares purchased. If your year-end statement does not break out trading fees for transactions made throughout the entire year, you then may need to review all of your periodic (typically quarterly or monthly) statements to get the needed detail.
Below is an exerpt from a fee-based advisor's statement which discloses the cumulative trading fees paid to the custodian during the full year. It should look familiar — it is the same AlphaGlider "Activity" summary that I presented in Step 2 above. I have boxed in red the year's worth of trade fees paid by this household to TD Ameritrade Institutional, $20.88, or about 0.01% of the value of the account.
Fund Management Fees — use Morningstar.com. If you own mutual funds and/or ETFs in your portfolio, it is unlikely that your adviser will explicitly disclose your fund management fees. However, you can calculate your fund management fees on your own. You will need to know the number of shares you own in each of your funds (this is on your latest investment statement), the value of these shares, and the fees associated with each of your funds (this is available on Morningstar). Just enter the tickers of your funds into the "Quote" field of Morningstar's homepage and you'll get a screen similar to the one below which shows your fund's expense ratio as well as its load fee if it is a mutual fund (note that ETFs do not have loads, but they usually incur a trade fee).
The process of determining all of your fund management fees can be quite time consuming, so I made available the Google Sheets spreadsheet template that I use myself (see button below). You will need a Google account to access it. The file is read-only, but you can work on a copy of it that you can save to your Google Drive by going to "File/Make a copy" in the pull down menus at the top of the spreadsheet. Once you have done this, you can overwrite the prepopulated data in the yellow cells — doing so will automatically pull in each fund's name and share price, each mutual fund's expense ratio (all pulled in from Google Finance). However, you will still need to enter ETF expense ratios and mutual fund load fees that you look up at Morningstar.
Let AlphaGlider help. If you made it through the first four steps and you still do not know how much you are paying in investment fees, then I suggest that you let us help. It is one of the things that we do and we have become quite efficient at it. Set up call time with us so that we can discuss your situation and to arrange for a way for you to get us a copy of your recent investment statements. No cost and no obligation.