As retirement approaches or you find yourself already enjoying this new chapter of life, understanding how financial advisors charge fees may become essential for securing your financial future. In today’s environment, signing up for a service with a stated cost is typically littered with back-end fees deep inside a lengthy legal agreement whereby the stated cost may not be the actual cost. In 2023, the White House estimated that Americans spend $65 billion on fees every year* --- it’s not a new trend, but it is growing in popularity amongst the service industry. In this post, I will break down the complexities of fees in our industry and give you concepts to take home so that you may apply these to your situation.
Navigating Different Fee Structures
As you consider working with a financial advisor, you'll encounter a few different fee setups:
- Fee-Only Advisors: These advisors charge a direct fee for their services, often based on a percentage of your retirement savings or a fixed fee. This provides transparency and advice that's in your best interest, without earning commissions from product sales.
- Commission-Based Advisors: These advisors earn their income through commissions on the financial products they recommend and sell to you. This setup has inherent conflicts of interest as the Advisor is paid based on transactions.
- Hybrid Advisors: These advisors blend both fee-based and commission-based elements. They charge fees for their services but may also earn commissions from certain product sales. While offering flexibility, this model requires careful consideration to ensure your retirement goals remain the top priority.
Unveiling the Real Costs
Beyond upfront fees, it's important to consider some additional costs on your investments:
- Expense Ratio: This is the cost of owning a mutual fund or ETF, including management fees and other disclosed expenses. It's crucial for understanding the true impact on your retirement savings over time.
- Turnover Costs: The cost of high turnover in your mutual fund or ETF can lead to increased trading costs and tax implications, which can eat into your retirement funds. This cost is not a part of your fund’s expense ratio.
- 12b-1 Fees: These are marketing and distribution fees used to cover the fund's promotional and advertising expenses. They are named after the SEC rule that permits them.
- Soft Dollar Arrangements: These are agreements where investment managers receive research or other services from brokerage firms in exchange for directing a certain amount of trades through them.
Choosing Your Retirement Partner
When selecting a financial advisor, consider:
- Transparency: Look for advisors who are upfront about their fees, potential conflicts of interest, and the services they provide. Transparency builds trust and ensures you know what you're paying for.
- Putting You and Your Needs First: Seek advisors who are committed to acting in your best interest. This means they're looking out for your retirement goals above all else.
- Experience: Look for advisors with experience in retirement planning. Don't be afraid to ask for references from other retirees they've worked with.
If you aren’t already working with PCA, we encourage you to schedule a 30-minute Zoom meeting so we can get acquainted. We believe you’ll be able to tell the “PCA Difference” in this first discussion!
Disclosures and sources:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
* https://www.whitehouse.gov/cea/written-materials/2024/03/05/the-price-isnt-right-how-junk-fees-cost-consumers-and-undermine-competition/#:~:text=Because%20of%20this%2C%20in%20previous,spending%20%2465%20billion%20per%20year.