How Much Are Your Investments Costing You?

cost of investmentsIf you like and trust your financial advisor, I’m glad for you. Having been in the advisory business for over 20 years, I know the value of a good relationship with the person who manages your money. But don’t let personal feelings overshadow your right to understand how he or she manages your portfolio.

I have a client who was, in my opinion, treated inappropriately by her financial advisor. During her tenure with this advisor, her retirement dollars were invested in funds that featured front load fees – up-front sales charges. She was unaware of these fees, which added up to a significant amount of money she didn’t know she was spending. Nor was she aware of the relatively high annual expenses charged by the funds involved. She told me she also paid an annual retainer of $3,000 and commissions on trades.

For example, one of the investments purchased by her financial advisor was the Putnam Capital Spectrum A fund, ticker PVSAX. An investment of $100,000 in this fund would immediately be reduced by 5.75 percent, or $5,750. An annual expense of 1.24 percent would be levied on the remainder, at a cost of $1,168.70 in the first year. Contrast this with another holding I was pleased to find in her portfolio – the Vanguard Health Care ETF, ticker VHT. There is no load associated with this security. The annual expense ratio is 0.09 percent. An investment of $100,000 in this ETF would incur no front load fee, and annual expenses would be $90. Managed funds such as PVSAX strive to perform such that their annual returns exceed their fees. History suggests that most managed funds are unable to do so consistently.

Unfortunately, this client’s story is not uncommon.  Many investors are unaware of the distinction between recommending suitable investments, at whatever cost, and acting as a fiduciary and recommending investments that are both suitable AND in the client’s best interest. Last month, Chris Arnold at NPR covered the issue of high load fees and lack of disclosure by advisors in his article, When Fees Attack: Rolling Over A 401(k) Can Trigger Big-Time Charges.

Never Hesitate to Question Your Advisor

While there are many competent and ethical financial advisors who work for brokerage firms and banks, it is not uncommon for them to push investments in mutual funds with which their employers have a pecuniary relationship. Many of these funds come with high expense ratios, high load fees, or both. Contrast this with another financial specialist who puts you first – the registered investment advisor.

A recent story in the New York Times cites former JP Morgan financial advisers who say they were “encouraged, at times, to favor JPMorgan’s own products even when competitors had better-performing or cheaper options.” This practice of pushing its own mutual funds is profitable and controversial, but not illegal.

The best practice is to ask your broker or advisor three questions.

  1. Do they hold themselves to a fiduciary standard?
  2. If not, why not?
  3. What are the fees on the funds in which he or she has invested on your behalf? If they can’t or won’t tell you, call me. I will. These details should be disclosed to you before a transaction is made on your behalf.

Interested in a year-end portfolio check-up from a registered investment advisor who operates according to the fiduciary standard? Contact us to schedule an objective portfolio review. We’ll analyze your current investments and coach you on how to move forward with your advisor or broker, or discuss other options if you’re not satisfied with your current relationship.

Be careful out there!

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