Many Americans don’t understand how much they pay their financial advisors, and it isn’t their fault, says Jay Shah, CEO of Personal Capital.
You almost need a Ph.D. to decipher many firms’ schedule of fees and expenses, since details, charges and commissions can be hidden in the fine print or not disclosed at all. (We won’t even get into those hidden referral fees that many “trusted professionals” you know are getting paid to send you to their pals).
But once all the fees and expenses are untangled, one thing becomes perfectly clear, says Shah.
Some firms are charging an awful lot of money.
According to Shah’s industry research, the highest fees are being charged by Ameriprise, UBS, Morgan Stanley, Wells Fargo and Merrill Lynch, some reaching as high as 3.5% per year.
We were not able to independently verify Shah’s research, but his findings underline the importance of understanding what firms charge, and especially what they try to keep hidden from view.
The bottom line? Ask questions to understand what you are paying and how it may color the investment advice you are getting. For example, does your advisor get paid more if you buy one investment over another? Is that an incentive to recommend you buy something you don’t really need? Did they pay other professionals you trust – like a broker, or a CPA – to refer your account?
Make sure fees are disclosed and not “buried” inside your investments. For example, our fees are clearly reported to clients each quarter. However, many products like broker-sold annuities, non-traded investments and commissioned products involve hefty fees and expenses that are completely hidden from view for the average investor.
Make sure your advisor is a fiduciary who is required to give you objective and reliable advice with your best interests in mind. Many financial practitioners are only required to comply with a lower, “suitability” standard that doesn’t require them to always do what is best for you.
And understand that while fees are a significant factor in the advice equation, what really matters is that you get the advice you need to make smart decisions and reach your goals. We’ve seen people overpay for incomplete and self-serving advice that doesn’t meet their needs, and just as many thrifty consumers refuse to pay for the professional advice they desperately need, only to stumble into much more costly and damaging financial dilemmas as a result.