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In our “It’s not what you earn, it’s what you keep” series, we’ve explored the effect of taxes, and expenses on the net return you receive as an investor. There will be more topics in this series, but I wanted to focus on a broader set of costs, and our philosophy of how we manage them.
When working with an investment advisor, you will often have three types of costs associated with the management of your account. Today we will look at each of them, and what we call our total cost management approach.
Advisory fee - we have discussed several times why we charge an advisory fee instead of working on commission. Typically, our fee can be billed in one of two ways. Most clients hire us to manage their investments on an ongoing basis. For this we charge a flat percentage fee that begins at 1.25% and drops as the size of assets rises.
Other clients work with us on a per project basis. For this, we charge a fixed dollar amount based on the size and scope of the project. Some clients either manage their own investments, or can’t hire us if their assets are tied up in a workplace 401k plan for example, but still need guidance from time to time.
In either case, we are being compensated for our advice, not for selling a product.
Transaction costs -We do not custody assets ourselves, but work with third parties who do. Companies such as Fidelity, or T.D. Ameritrade hold your investments, provide monthly statements, and execute trades at our direction. Depending on the type of investment, they may charge a commission on each trade. For stocks and exchange traded funds, that usually means $10 or less for a buy or sell. For mutual funds $20 is typical, although there are some funds that do not charge a commission at all.
Internal investment costs – as we discussed on Wednesday, the internal costs of mutual funds are often overlooked. The industry average hovers around 1.5% for mutual funds. Although we will buy a fund that has costs in that range, our average for all holdings has been about a third of that. We are able to come in well below the industry average by using what are called “no-load” funds. No-load, means there isn’t a sales charge to buy or sell the fund. This also means the internal costs are less, as there isn’t a revenue sharing agreement that pays a broker an ongoing fee.
Although there can be other costs associated with an investment account, these are the primary ones. Our total cost management approach means that we are constantly monitor and manage the administrative costs of your investment portfolio.
We do this by reviewing your portfolio’s size, and plans for deposits or withdrawals. Based on this, we can determine the appropriate mix of investments. For smaller accounts, or larger ones with planned distributions, we often use an allocation of mutual funds only. Larger accounts will often contain individual stocks. We leave them out for smaller or distributing accounts because we normally own about 25-30 stocks in those accounts. Although the trading costs are low, over the course of a year, and 30 different names, it can add up.
We feel that clients benefit from our ongoing commitment to managing their investments under this total cost management philosophy. After all, it’s not what you earn that matters, it’s what you keep.
