How It All Adds Up

March 21, 2014

Fees are not fun. In life it seems like everything has a fee and we begrudgingly pay them, silently handing over our card with epic stoicism. But rarely in life can fees haunt you as much as they can in your investment portfolio. Because of compounding interest, small fees that can seem nominal add up in a big way. So much so that the SEC has recently published a piece to inform investors of the impact fees can have, and how they can become more informed about the fees they are paying and how they affect their portfolio over time.

How can you get informed? Find out more about the kind of fees you’re paying. A good place to start is to look at your statements. It’s important to understand the fees because they impact your investments in a big way. Once you’ve scrutinized your statements, call your financial professional and ask some questions.

What are the fees I’ll be charged?
Is there a fee schedule that lists ALL the fees?
What fees will I have to pay to purchase, hold and sell the investment?
Will the fees appear on my statements?
Are their transaction fees? Inactivity fees? Wire transfer fees?
How do the fees and expenses help me meet my objectives?
How much does the investment have to increase before I break even?

Also, and perhaps even more critical is to understand how your financial professional is compensated:

How do you get paid? By commission? Fee only? Do they very depending on the amount you manage?
Do you get paid from other sources?
Do I have any choice on how you are compensated?

Learning about the fees you are paying pay is critical. When working with your financial advisor it can be a challenge because often times an advisor can be incented significantly based on the fees the client pays. Learning about your advisor’s compensation model, then evaluating his advice from the perspective of “Why is he recommending this to me” can make all the difference in the ultimate return your portfolio is able to generate. Working with an independent, fee-only fiduciary advisor can help because they often work to reduce fees on your behalf and can monitor your other service providers to be sure you are not being over-charged.

By understanding the fees you are paying, you can become better equipped to make critical decisions necessary to manage your wealth. Read the Investor Bulletin from the SEC How Fees and Expenses Affect Your Portfolio.