The Investment Scientist

Are You Paying Fees Up to Your Nose?

Posted on: March 6, 2017

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Recently, the Wall Street Journal reported that Merrill Lynch had just lowered fees for their fee-based accounts from 2.7% to 2.2%. Let me also quote:

“The reduction affects clients with under $1 million in assets at the firm. Those clients with $1 million to $4.9 million in assets will continue to pay a maximum of 2.2%, while investors with $5 million or more in assets will continue to pay a top rate of 2%.”

I’ve done a lot of second opinion financial reviews over the years and these fees are broadly consistent with what I’ve seen in portfolios managed by Wall Street brokerages like Merrill Lynch, Morgan Stanley, Ameriprise etc.

In comparison, my fees are 1% for the first million, 0.7% for amounts up to $5mm and 0.4% for amounts over $5mm. Most independent RIAs (registered investment advisers) are like me – our fees are about a third of those by major brokerages.

Everything else being equal, if you are paying 1.5% more a year in fees, a back-of-the-envelope calculation will tell you that in 20 years you will be 30% poorer because of those higher fees. In 30 years, you will be 45% poorer.

But everything else is not equal. There are two other major distinctions between brokers and RIAs:

  1. As RIAs, we are required by law (The Investment Adviser Act of 1940) to disclose all fees transparently, and not to receive any third party payments like commissions and kickbacks.
  2. As RIAs, we are required by law to act as fiduciaries. That is we have to always put clients’ interest first.
Brokerages operate under a different law (The Securities and Exchange Act of 1934) that does not impose the same disclosure and fiduciary requirements. Therefore, it is legally permissible for them to not disclose how much they make off of you and it’s legally permissible for them to act against your best interests.

If you currently have a broker as your “financial adviser,” you may want to use my second opinion review service to at least find out if you are paying up to your nose.

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

Twitter: @mzhuang

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