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Some Client Considerations with Fees and Investment Costs

Advisers depend on client fees and/or commissions for their income. Most advisers follow the practice of full disclosure of how they are compensated and do this in the investment advisory contract signed by their clients as well as through their brochure which is also filed with the appropriate regulators. The statements and confirmations generated by the adviser or custodian will reflect the charges as well.

Many advisers tout their investment selection and performance to attract new clients and retain the existing ones. However, clients also need to be aware of more than the adviser’s published fees and commissions when they look at their investments and the costs to them. For example, although an adviser’s annual fee of, say, 1 percent does not sound like a lot of the top of the claimed performance, think about the impact of the other costs. These include trading costs and commissions, the expense ratios of mutual funds you own, the impact of inflation and, at least in taxable accounts, the impact of income taxation of dividends and capital gains. This range of items can subtract several points from a portfolio’s performance and has a real effect on the bottom line.

What the client and adviser can do about this starts with full disclosure and setting expectations. It is a lot easier for a client to digest the costs if they are understood and investments are chosen with that in mind. If an actively managed fund can generate a significant rate of return above the markets, then even after subtracting all the costs, the client may be well ahead. Or not.

An important subset here is the existence of proprietary funds or investment products that an adviser is asked to promote for an employer or other connection. If these funds, as is often the case, carry a larger expense ratio than other similar funds, the adviser is well-advised to let the client know and to ensure that the choice to invest is an informed choice. It should go without saying that if the adviser is compensated by these funds or products for a sale that this should be made clear to the client as well BEFORE the sale.  

The takeaway is that clients should know what their options are and what the adviser’s interest in those options may be. There is nothing like an informed decision to let both adviser and client sleep at night. 

2 Comments to Some Client Considerations with Fees and Investment Costs :

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