Discussions You Should Have Regarding Your Financial Advisor Fees in 2011
Please watch Ed Butowsky on Willis Report (Fox Business News) discuss how financial advisor fees allow financial and mutual fund advisors to make money off of clients by keeping them in the dark, and how clients can reduce these expenses. This segment is currently being featured as an “Editor’s Pick” on Fox Business News. Click above to watch.
Eliminate large markups on bonds
Demand that advisor stop taking enormous markups when purchasing and selling bonds. Often times, clients have no idea the size of the markups advisors and brokers take when purchasing municipal, government and corporate bonds. An advisor knows that the “markup” or “mark down” is not reflected on the trade confirmation that client receives. As a result of this, clients rarely have an appreciation for how much money their advisor is voluntarily taking on each trade. Clients have the ability to negotiate this amount and should prior to initiating the transaction. This type of shoplifting is subtle, but very damaging to your returns.
Remove management fees on money market
Why would you invest in something when you know without question that you are losing money from the beginning? With interest rates as low as they are on money market, your advisor should promise to stop charging a management fee on any money you have in money market. Most money markets are paying 20 basis points and as a result of your advisor’s management fee of usually 1% or more, you are actually guaranteed to lose money. You can remedy this very quickly and easily by emailing or calling your advisor and requesting that they stop charging on money markets. Most clients do not realize that they have the power and right to request this.
Why mutual funds vs. ETF’s?
Ask your advisor to evaluate and look at all ETFs as an alternative to the mutual funds in which he has invested your money. An advisor make substantially more money by putting you in mutual funds, verses the equivalent ETF and often times the ETFs perform better. As a general rule, advisors sell you mutual funds because they make more money doing it. I encourage you to go to www.personalfund.com and look at how your mutual fund stacks up vs. the ETF equivalent. You will be shocked at how much more you are paying in fees and imbedded taxes than what was disclosed. You will wonder why your advisor encouraged you to invest that way.
Keep fees for stock transactions below $10
The investment world has changed considerably over the last 10 years and especially in the way brokers and advisors charge their clients. With the onset of online access and accounts, brokers no longer make most of their income via stock commissions. Here again the client has the power and right to negotiate commissions on any stock transaction. As a general rule no one should be charged more than $9.99 per stock transaction, buying or selling. This is the going market rate and you should request and demand this. By reducing your stock transaction expense you can immediately increase the return on your portfolio, this is very simple and easy to do.
Eliminate wrap fees on mutual funds
Demand that your advisor eliminate any wrap fees charged around mutual funds. This is an unnecessary fee and you should be aware that you do not have to pay this. Financial advisors and brokers like to have predictable income for themselves and therefore often times charge rap fees on the accounts they are managing. This is a very common and acceptable practice, but should not be abused with mutual funds. Mutual funds are very fee intensive by themselves and each family of funds allows free movement between funds within their family. I believe this is one of the worst abuses in our industry.
Keep management fees below 1%
Renegotiate management fees. Your management fee should only be charged at a rate of 75 to 100 basis points and should not be charged on bonds, money market, mutual funds or any legacy positions in your portfolio. Anything over 1% is egregious.
Explain how your advisor measures risk
Your advisor, in the first quarter, needs to explain how they measure risk in your portfolio. Advisors often times will tell you that they care about the risk in your portfolio, but often fail to explain how they measure it. Additionally, to see if your advisor is truly knowledgeable about portfolio management simply ask what is the Sharpe Ratio of my holdings over the past 10 years based on my current allocation. If your advisor can not answer this question immediately and easily, then you should resolve to find a new advisor.
Ed Butowsky is an internationally recognized expert in the investment wealth management industry. Ed appears live on various new channels such as CNN, Fox News, and Fox Business just to name a few. He covers various topics from taxing the rich to money management.
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