What is Your Advisor Charging You?

July 3, 2014

Not only does a client not know what his or her advisor is charging, but, on average, the advisor doesn't know either. How is this possible?

Surprisingly, not only does a client not know what an advisor is charging, on average, the advisor doesn’t either, according to a recent survey by Peak Advisor Alliance and Cerulli Associates reported by ThinkAdvisors.com.

How is that possible? The survey showed that almost 63% of advisors believed their costs were less than 1.5% of assets for management. In reality, they were charging more than 30 basis points in excess of this. So, if they thought the costs were 1.5%, it was 1.8% actually. Or if they believed it was 1.6%, then it was really 1.9%. The reason for this disparity is that the advisors were not taking into account all of the fees including administrative, platform (distribution costs), and even their own charges.

The upshot of this is that when advisers inform clients what they are charging, it is not correct because they don’t know themselves. However, the charge is never less; it’s always more.

This is at a time when John Thiel, now the head of the Bank of America Merrill Lynch’s wealth unit, told attendees at a Securities Industry and Financial Markets Association private-client conference:

As major financial firms look to establish more trust among clients they need to do more to be upfront with clients about the fees that they are being charged for advice and financial products. As an industry, we need to create transparency. We have to get there in terms of transparency around fees.”

The above was reported in InvestmentNews.com.

Paul West, the managing director for Peak Advisor Alliance, counseled advisors to be more aware of their fees as a result of this study. He also suggested advisors become more accurate and transparent with their clients about their fees.

West’s counsel is important not only because it will engender trust in the client—advisor relationship, but also it impacts the bottom line of a client (the higher the fees, the less the client keeps) and the advisor (generally, the higher the fees, the more the advisor retains).

If a client pays an advisor roughly 2% of assets per year, that is money lost forever. At 2%, that would be $2,000 of $100,000; $20,000 of $1 million; $200,000 of $10 million, etc. Those who invest their own money can save this sum every year rather than pay it to their advisors. Thereby, they can reinvest it to make yet more money.

Read more:

Contain Expenses to Increase Returns

This information and content is offered for informative and educational purposes only. MyMoneyMD, LLC, is not acting as a Registered Investment Advisor, Investment Counsel, Tax Advisor or Legal Advisor.