Military Finances 101: How Much are You Actually Paying for Advice?Managing Your Finances
I'd say that in most purchases, what you pay for the item is pretty clear. Unfortunately, that isn't necessarily the case when it comes to financial advice. While some models of "pricing" are more transparent than others, in all cases you'll need to be specific when talking with an advisor about fees. That doesn't mean advisors are dishonest, it just means that there can be a lot of places where you actually pay fees that don't involve the advisor. So, let's take a look at the fees you could be paying.
Fees You May be Paying
Annual Flat Fees. This is a new trend in advisor compensation and what we've chosen to use at C.L. Sheldon & Company. You and the advisor agree on a fee and you pay it. The fee is normally charged in arrears and may be actually paid quarterly or monthly.
Assets Under Management (AUM). This is the most common way Registered Investment Advisors (RIA) are compensated. In this case your advisor charges you, normally quarterly, a percentage of the assets you have with the advisor. Typically, this fee is around 1% of AUM annually for the first $1M dollars, but can be as high as 2% or more.
Loads. Certain mutual funds charge an upfront fee called a "load" when you purchase the funds. The load is used to pay the person who convinced you to buy the fund and other expenses associated with marketing the fund. Loads can go as high as 8%. On occasion, the load is paid when you sell the fund. Some funds charge a 12(b)1 fee, which in my mind is an on-going load. The 12(b)1 fee goes to the advisor that sold you the fund to reimburse him or her for marketing expenses.
Fund Expenses. It takes money to run a mutual fund and/or Exchange Traded Funds (ETF). All fund based investments will have to pay some expenses in order to operate. The amount taken from the fund is called the expense ratio and is paid based on the amount of money you have in the fund. Expense ratios can range from 0.03% to 1.00% or more. Lower fees are associated with index ETFs and mutual funds and higher expenses are generally associated with actively managed funds.
Trading Expenses. On some assets you pay a transaction fee when you buy or sell the asset. These are normally called commissions and can range from free to $25 or more per transaction.
Commissions. Unlike the trading expenses, above, these are commissions paid to salesperson making the sale and are normally paid on insurance policies, non-traded REITs and some other investments. In many cases, you won't be able to find out what the commission is, as they are not normally disclosed.
It is worth it to highlight that not all the fees above are paid to the advisor.
There is No Such Thing as a Free Lunch
Realize that there aren't any advisors out that are operating as a charity (unless they've taken you on as a pro bono client). So, if you're told you don't pay for the service the hair should stand-up on the back of your neck. Some advisors say that the company they represent pays them and you don't pay them anything. Of course, where does the company get their money? From you (and other clients).
Military Finances are Different
Just like your life is different than a civilian's, your financial affairs are different than a civilians. As an Active Duty military member or retiree, you have benefits and options not available to civilians. Because of that, we think you should work with a Financial Advisor or Planner that works with military members and retirees each and every day. If you like to chat give us a call or use the button below to schedule a meeting.
If you found this article useful, you might like the following blog posts:
Retired Military Finances 101: Taxes
Military Finances 101: What are REITs and how do they work?
Military Finances 101: Should I Pay Off My Mortgage Early? 5 Things to Consider