3 things you need to know about investment fees

Not all advisers are created equal. It’s extremely important to interview several advisers to make sure you are getting tangible value for the fees you are paying.

Finding a trusted fiduciary adviser who is transparent with their fees and who can quickly articulate the value received for those fees usually tend to be a great long-term financial partner.

For a review of your financial plan and an in-depth review of the fees that you may or may not know about, call us at 385-CFP-4000. For information, visit us at www.divergentwealth.com.

1 |    Use Two Lenses When Analyzing Fees

Lens #1 | Fees can be a direct drag on investment performance

How true this is! Using this lens helps us remember we must be vigilant about keeping fees as low as possible. However, using only that line of reasoning may get you into a bit of trouble. It’s needs to be coupled with Lens #2.

Lens #2 | What are you getting for that fee?

A professional sports team can save a ton of money by only using the cheapest players available on the market. Smart move?

A frugal shopper may use a coupon to save 50 cents on a bag of chips, but they drove an extra 5 miles to the store offering the coupon. How much money and time did they really save?

All advisors are not created equal. The most important question you can ask is, “what am I getting for the fee I’m paying?” That question coupled with a vigilant effort to keep fees as low as possible may yield you the best results over the long-run.   

All that said, there are generally two fees that are critical to understand. The “investment vehicle fee” and the “advisors fee”.

2 |   You Have to Understand the Basics

The two most common fees you’ll pay when investing with an advisor are the investment vehicle fee and the advisors fee.

THE INVESTMENT VEHICLE FEE | this is the annual cost of holding a security in your portfolio. We call this the “invisible fee” because it’s usually only disclosed in a prospectus and rarely discussed by advisors (even though it should be). It’s therefore invisible unless you know to look for it. This “invisible fee” is usually taken from the performance of the fund, meaning mutual funds are showing you their performance “net of fees”. For example: 

If you own a mutual fund and its underlying securities are up 10% for the year and the mutual fund has a 1% fee, the mutual fund will report to shareholder that it was only up 9%. Conversely, if that same mutual fund is down 10% for the year, it will show it’s actually down 11%.

Being aware of this fee and viewing through both lenses described above can you make you a more prudent decision.

THE ADVISOR FEE | this is the cost of working with an advisor. It’s important to note that not all advisors are created equal. With that in mind, advisors are typically compensated in one of three ways…

3 | The 3 Ways Advisors are Typically Paid

1. Commission-Based | transaction-based commissions for selling specific financial products or investment vehicles
2. Fee-Only | charging an annual fee that covers all costs and is based on the assets being managed by the advisor
3. Fee-Based | a combination of receiving commissions for products or charging a fee for assets they managed

If your adviser is a trusted fiduciary, we believe the “FEE-BASED” model has the fewest conflicts of interest. At Divergent Wealth 90% of the time we use the “Assets Under Management” approach. We believe this aligns the adviser on the same side of the table as the client, where the adviser cannot increase their annual compensation unless your account value increases. This is simply because they are compensated on a small percentage of the total account value.

However, there are times, when a commission-based product or an insurance product may be a cheaper investment option over the long-run compared to the fee only model. As a fiduciary we want the ability to help you make that decision. 

Fees are a topic that seem to be avoided in our industry, but they shouldn’t be. Understanding what fees you pay and more importantly what value you are getting for those fees is critically important to your investment success. Finding a trusted fiduciary adviser who is transparent with their fees, and who can quickly articulate the value received for those fees, usually tend to be a great long-term financial partner. For a review of your financial plan and an in-depth review of the fees that you may or may not know about, call us at 385-CFP-4000. For information, visit us at www.divergentwealth.com.

Author | Jordan R. Collins, CFP®CRPC® Co-Founder | Managing Partner of Divergent Wealth

Divergent Wealth Advisors LLC is registered as an investment adviser with the SEC and only transacts business in state where it is property registered or is excluded or exempted from registration requirements. SEC registration in an of itself does not constitute an endorsement of the firm by the commission nor does it indicate that the adviser has attained an adequate level of skill or ability.

The information contained in this material is given for information purposes only, and no statements contained herein shall constitute tax, legal, or investment advice. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the needs of an individual’s situation. You should seek advice on legal and tax questions from an independent attorney or tax advisor.

Individual clients should review with their adviser the terms, conditions, and risks involved with specific product or services. Neither the information provided, nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.