The many ways fees are extracted

[prudent]

Reviewing an asset management account agreement for a relative, I tried to catch the ways fees are extracted from the investor. We rightly focus on ERs and loads but I spotted a couple other methods that were, let's say, less than obvious.

First was the prominently disclosed asset management fee of 0.9% per year. This was in big bold print, very obvious.

But beyond that was some fine print that stated some of the investments may be in load funds. Some of that front-end load "may" be rebated to the advisor. Then was some additional fine print that said some funds "may" have 12b-1 fees... and some of that fee "may" be rebated to the advisor.

Finally, there was the section about the cash sweep feature. It pointed out funds would be swept to a bank money market fund and they would automatically divide up funds across multiple banks if necessary to ensure no single bank had a balance in excess of the FDIC insurance limit. And in that part of the fine print, it noted the banks rebate some of the interest earned to the advisor, up to 200 basis points. Currently the investor would be getting 0.05% APR on sweep funds.

If you are investing without the advisor you would still pay the 12b-1 and load, I suppose you could argue these clauses don't actually increase the amount the investor is paying. But they are certainly increasing the amount the advisor is getting, and who could be surprised if load funds turn out to be the advisor's choice.

There are also transaction fees on everything, and it wasn't clear to me if the advisor gets any of those.

Have you noticed other ways that paid advisors increase their fees beyond the management fee?

[livesoft]

Maybe there are more fees listed here: http://seekingalpha.com/article/15274-e ... honest-fox and in the follow-on chapters.

The markup on bonds is probably completely hidden as is the markup on share prices for reinvested dividends.

[chaz]

Caveat emptor.

[prudent]

Good link, livesoft and excellent point about foggy pricing on bonds.

Caveat emptor indeed applies and to their credit, the agreement I read did include all that information when I suppose they could have simply omitted it altogether and not been transparent about it.

[tfb]

I would worry more about the actual fees as opposed to theoretical fees. If loads and 12b-1 fees are rebated back, you are left with the 0.9% asset management fee. The sweep account paying 0.05% is competitive with low-fee Vanguard money market fund paying 0.03%.

[LadyGeek]

The wiki has a comprehensive list. See: Expense Ratios and Mutual Funds: Additional Costs

Another consideration, probably not in the agreement, is that investment managers need to keep a buffer in the sweep account. IOW, they need to have a certain amount of funds available to pay the asset management fees. So, the fund holder won't be getting the stated returns until there's enough cash in the sweep account to cover the advisor's expenses.

BTW, be sure to check the advisor's credentials and background. See: Investment adviser

[prudent]

The sweep account paying 0.05% is competitive with low-fee Vanguard money market fund paying 0.03%.

I thought about that, but I wonder what happens when rates rise, and they can take up to 200 basis points.

[tfb]

The sweep account paying 0.05% is competitive with low-fee Vanguard money market fund paying 0.03%.

I thought about that, but I wonder what happens when rates rise, and they can take up to 200 basis points.

You worry about it when you see the yield on the sweep account is substantially less than that on the Vanguard money market fund. The amount of money in the sweep account would be a lot less than the money invested. Up to 200 basis points times 1% of the portfolio is only up to 2 bps.