Careful Financial Advisors Are Raising Fees – What You Need to Know
It has been my experience that there is so much misinformation on how fees work in the financial advice and investment/money management business. I am starting a two part series on what you need to know.
The new Fiduciary Rule partially goes into effect this April and is in full effect January 2018. I won’t bore you with the details of this 1000 page piece of legislation. You just need to understand the end result on the financial advisor industry and how it potentially affects you. So, just take this as the bottom line. For the advisor, it creates additional liability, increases costs, and limits how they can earn money if they are commission based. For the client, your advisor might drop you as a client because of the liability/cost, raise your fees because of the liability/cost, or start charging you a fee because commissions have been reduced or taken away.
So, if you are working with a financial advisor, here are the scenarios that you might face:
1) Increased Fees
They may already be charging you a money management fee for managing your investments. They might raise those fees. First, make sure that your advisor is doing something for that fee. It isn’t called a money management fee for nothing. Most advisors charge a fee and do not actually manage the account. Management of the account means buying and selling investments strategically to protect and to grow the account. So, if they are charging a fee for doing nothing, I would consider finding someone else. If they are actually managing your account and you like what they are doing, then you have to decide if the increase in fees is worth it.
2) Start Charging a Fee
If you have been in a commission based account, now your advisor wants to start charging you a management fee. First of all, this in my opinion is a violation of the fiduciary rule which states that you have to put your client’s interest first. Many advisors are switching over to a fee based model because they can’t earn commissions anymore. If that is the case, think hard about why you would want to start paying a fee for someone who has no management experience and probably will not do anymore than they were doing when they weren’t charging you a fee.
3) Drop You as a Client
Since the new rule increases liability, there will be some advisors who drop smaller clients. I personally think that makes no sense. If that is the case, send me an email (email@example.com) and let’s talk. They obviously don’t have the proper framework set up in their practice.
Fees can be a confusing subject. However, knowing just a little information can clear up the confusion. The bottom line is simply this. If you are paying a fee, what are you getting for it or what do you hope to get for it? If you can’t answer that question, then you are perceiving no value for the fee you are paying.