The Dawn of Retirement

We’ve become spoiled. These days digital tools make it easy to shop online and compare prices for just about anything from running shoes to computers to professional service providers like doctors and accountants. But one industry has always stood out for its opaqueness and lack of transparency when it comes to pricing—investment advice and services. It’s difficult to compare prices without knowing what you are paying in the first place.

You and your neighbor may both work with “financial advisors,” but they can differ greatly in the services they provide and how much they cost. One of you may work with a stockbroker or insurance agent employed by a brokerage firm, insurance company or other financial institution. The other may work with an advisor who is independent and runs his or her own business.

A stockbroker or agent is an employee, paid on commission. An independent wealth advisor, who charges pre-set fees for their services, is a self-employed, independent business person.

There are many differences between the two, and neither is good or bad. As an aware consumer, you will want to understand how they differ, and have enough “self-knowledge” to know what level of investment advice you are looking for. Here I will point out the major differences between a commission-based and independent advisor and do my best to explain how to compare their costs.

As a career financial advisor who has worked as a broker at a large financial institution and now runs my own fee-only advisory firm, I can discuss the differences in client fees that each charges—based on my personal experience—so that you can begin to do some price comparisons of your own.

These days you have three options for obtaining professional investment advice:

Broker, representative or agent at a financial institution like Merrill Lynch, your bank, or an insurance company.

Brokers are commissioned employees of the firm they work for (broker-dealer) and are regulated by FINRA (Financial Industry Regulatory Authority), a self-regulatory body, not a government agency. (Some have likened FINRA to the fox guarding the henhouse.) They are licensed to sell products.

When it comes to “fiduciary responsibility,” brokers must act in a client’s best interest, but they do not have to offer the lowest cost investments. A broker’s fiduciary responsibility is to the firm (their broker-dealer). The relationship with their customers tends to be transactional.

Brokers make money by selling stocks and other investment products. A broker’s compensation comes from commissions from selling stocks, bonds, mutual funds and other investment products. Because investments have their own internal costs as well as costs related to a broker’s commission, it can be difficult—even close to impossible—for a client to know what it costs to do business with a broker. Most think it’s free because they don’t see the fees they pay. It is not.

Independent Registered Investment Advisor (RIA)

RIAs must work to a higher standard. Not only must they act in a client’s best interests, they must offer the most competitively priced investment to accomplish the goal. Their responsibility is to the client, not their employer. They are compensated by pre-set fees paid by clients, thus the title, “fee-only advisor.”

Independent advisors are regulated by the Securities and Exchange Commission (SEC), a government agency. Fee-only advisors typically have a more full-service relationship with clients. They are licensed to give advice.

Because fee-only advisors are not paid on commission, they usually charge clearly delineated fees for the advice and management services they provide. Fees generally range from .5% to 2% of total assets managed. In addition, some advisors also assess a client a wrap fee to cover miscellaneous charges like trading costs. These wrap fees tend to be around .25%. A fee-only fiduciary advisor is legally responsible for choosing suitable investment solutions that are also cost effective.

Robo-Advisor

Everything is going digital—why not investment advice? Robo-advisors came on the scene after the financial crisis of 2008 and have proven to be a viable, low-cost alternative for investors who don’t have complex needs. Artificial intelligence is behind these automated investment platforms helping with asset allocation, tax loss harvesting, and other financial planning tasks that can be automated.

The customer fills out an online questionnaire, and the system selects the right assortment of (primarily) mutual funds and ETFs that meet the customer’s risk tolerance and financial goals. Robos charge a flat fee, typically from .25-.50%.

Comparing prices

To begin to understand the true cost of purchasing investments and financial advice, you need to understand the hidden costs of investment products, not typically itemized when working with a broker or agent because they are considered “internal” product costs. Below is comparison of costs based on my previous experience as a broker with a large financial institution versus how I charge fees now as a fiduciary, fee-only advisor. This is for illustrative purposes only and is based on a fictional portfolio comprised of mutual funds and annuities. Costs estimates are approximations only and vary widely among advisors and their firms.

EXAMPLE: Typical costs for using an advisor on $1 million portfolio

Fees Commissioned Broker Fee-only Advisor Robo-advisor

Financial Planning	$1,200	None	Not offered
Mutual Funds ($700,000)	$6,300 Based on a portfolio comprised of both active and passive funds with a combined internal expense of .9% (90 bps). $700,000 x .9% = $6300	$4,500 Based on internal investment costs averaging .45% of $1,000,000	$3,500 Flat fee based on median fee of .35% (35 bps)
Annuities ($300,000)	$21,000 Internal costs based on an average of 2.35% ($7,050) + Broker’s upfront* 7% compensation from annuity company ($13,950) *Some brokers don’t take upfront compensation and charge an annual % instead	None	Not offered
Advice*	$7,000 1% fee applied to mutual funds only	$11,500 .9% of $1,000,000 ($9,000) + .25% account fee ($2,500)	Not offered
1st year total cost	$21,550 or around 2%	$16,000 or 1.6%	$3,500
Over 20 years	$431,000	$320,000	$70,000

*Many Broker Dealers charge an investment management fee, typically 1% of assets they manage. If there is no “advice fee” then the client would most likely pay a sales charge of 5.75% in an A share, or higher internal costs of around 1%. See above for details.

In this scenario, if you use a broker versus an investment advisor for 20 years, the difference in fees could be more than $100,000. As the portfolio grows, the fees will also grow accordingly with both the broker and advisor, so the difference in overall costs could be even greater than this example.

Choosing a financial advisor is about more than cost. You need to consider how much and what type of advice you need and what type of working relationship you want with your advisor. Whether it’s a broker or independent advisor, you will want to work with someone you can fully trust to develop the right investment strategy for you, one that includes performance, proper tax allocation and sound decision making.

But since the expenses of having a broker or advisor can be significant, ask your advisor to delineate how they are paid and to spell out all any invisible fees you may be charged. A percentage difference here and there may seem insignificant, but when applied to a growing portfolio, small percentages can consume money that you would otherwise be investing.

Still have questions? Not sure what’s best for you? At Relevé, we’re a fee-only, independent practice with over 20 years of experience in helping clients find financial success. Whether a fee-only approach interests you or not, we’re happy to help answer any questions you may have on either your retirement or your financial advisor. Call us today at (612) 801-0556 or email info@relevefinancialgroup.com

Dawn Jurkovich, CFP®, BFA, CRPC®, is the founding partner and president of private wealth advisory, Relevé Financial Group, with locations in Minneapolis, MN and Scottsdale and Lake Havasu, AZ. She has been advising clients for nearly 20 years.