There is no such thing as a free lunch. It is also true that there is no reason to pay a premium for something that is common and routine; however, this is what most investors do when they do it themselves or use a commission-based advisor, agent, banker, broker, or planner. Let's look at the real numbers for many investors.
If you have an advisor who is charging you a percentage of assets under management, you were dealing with a commission-based salesperson. Although they will tell you it is a fee, their compensation scheme is a commission. Now consider the fact that many of these salespeople are delegating all of the duties and responsibilities of investment management to a third party asset management platform (TAMP).
If the TAMP charges 0.5% on an annual basis, and the person you are working with is charging 1.5%, you were paying 2%. But there are additional costs that are just as non-transparent and often overlooked.
If the TAMP uses mutual funds as the primary funding vehicle for your brokerage account, then there are costs associated with those mutual funds. The same is true for ETFs or any other "bundled" financial product. All mutual funds are run by investment advisors, and if you are keeping track, this makes the third level of investment advisory charges imposed on your brokerage account. The management charges for a mutual fund are based on the same scheme that the TAMP and your person utilizes. Assets Under Management (AUM) is a compensation scheme that is far more expensive than what most investors realize. Let's continue with today's example, and for many, this will be eye-opening.
If the mutual funds in your brokerage account take an average of 1% off-the-top on an annual basis, you are now paying 3% per year on an all-in AUM basis. If that didn't raise your eyebrows, then you might want to take time to think about the impact this has over a 5, 10, or 20 year period.
A $100,000 account is paying $3,000 per year, and a $1 million account is paying $30,000 per year. But note that the amount you are paying is usually deducted on a quarterly basis, directly from the value of the account, and thus you never know what you will be paying until the quarter ends and the commission is deducted from your account automatically. Blind convenience can be very costly.
On top of the AUM commissions, there are additional costs, such as per trade commissions that can become very expensive. If an investment advisor is also affiliated with as an owner or subsidiary of a Broker/Dealer, there is an inherent conflict of interest and the possibility of excessive churning (trading) of the account.
We encourage you to consider the advantage of fixed cost investing over a commissio-based salesperson who makes more if you buy or sell more, have more assets under management, or takes a cut of your profits through a hedge fund.
Remember that with commission-based salespeople, they either want you to continue to buy and sell, or to give them more money to manage. They are always conflicted, and this often results in more money being invested in high risk and volatile investments than is necessary.
Use our online calculator to see if it would be beneficial to you to use fixed cost investing when you consider the total cost that you are paying them.
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