Most people know how much they pay a month for Netflix, but do you know what you are actually paying for financial advice? If you are being served by a fee-only Registered Investment Advisor (RIA), like Rowling & Associates, you can be sure that your advisor is recommending what is best for you. Why? Because RIAs are legally held to a “fiduciary” standard that requires them to put your interests first. And, because a fee-only RIA does not receive commissions or get referral fees, there is no hidden agenda.
If you are currently using or considering using a financial advisor, please know this: Unless your advisor can clearly state that he or she is a fee-only RIA, you won’t know how much you are paying. For example, a stockbroker might skirt the question by saying that you aren’t paying anything out-of-pocket for advice. But, as opposed to RIAs, stockbrokers are held to a “suitability” standard, not a fiduciary standard. This means that if your broker believes a US stock fund is appropriate for you, he or she can recommend a fund that pays a big fat commission – because the investment is “suitable.”
How can you tell if you are paying hidden fees? For one, take a look at the business card. If it says “Securities offered through …,” you are not working with an RIA. If you’ve already invested, look for the following on your statements:
If you own an annuity (especially in your IRA), your broker (or insurance person) made a huge commission, sometimes as much as 10 percent! And, if you want to get out of the annuity, you will forfeit 10 percent or more if you pull your own money out within a certain period of time – sometimes up to 10 years or more.
Mutual Fund A Share
If you have a mutual fund that has an “A” at the end, it means that your stockbroker got money up front when you purchased the shares. For example, American Funds (popular stockbroker products) pay the stockbroker a commission of up to 5.75 percent for selling their funds.
Mutual Fund B Share
If you own a mutual fund that has a “B” at the end, it means that your broker got some money up front from the fund company. You will likely be required to pay a penalty (sometimes up to 10 percent) if you sell the shares within a certain period of years. Additionally, the fund might charge “12b-1” fees each year (for “marketing”), typically one percent.
Mutual Fund C Share
A mutual fund with the letter “C” at the end charges 12b-1 fees every year. Essentially, the longer you hold the fund, the more “commission” you are paying.
So, how can you judge your costs? Look at the fine print on your funds’ prospectuses or websites. If you have $800,000 invested in commission-based funds, you could have paid as much as $46,000 when you invested. Ongoing operating expenses and 12b-1 fees could be 1.5 percent, or $12,000 per year.
It’s true that you pay for the advice of a fee-only RIA, but that is the only money your advisor will receive. And, advisors work with you on more levels than simply investing by helping with financial planning and advice. Your investments will be in no-load (commission free) funds without 12b-1 fees and without withdrawal penalties. If your RIA charges one percent of assets under management, wouldn’t it be worth $8,000 per year? For this tax deductible amount, you will get unbiased advice; avoid commissions, surrender charges and 12b-1 fees; access higher quality funds and pay lower fund costs (typically under 0.5 percent).
If you’re not currently a client of Rowling & Associates, please check us out! And, if you are a client, please let your favorite friends and family members know about the benefits of fee-only advice.