Your financial advisor may be charging you fees that are based on a percentage of your AUM. The more assets you have under management, the lower the percentage they usually charge in fees. A fee of around 1% per annum is considered to be normal in the wealth management industry.
But you could be actually paying much more than that. If your money is deployed in mutual funds, for example, the mutual fund company could charge several types of fees. A sales charge or “load” is common. This is essentially a sales commission that is paid to the intermediary who is promoting the fund. Your financial advisor could be collecting some commission from the mutual fund company for investing your money into their fund.
“Trailer fees” from mutual funds could be another source of income for your financial advisor. These are paid on a yearly basis as long as the investor continues to hold units in the fund. The rationale behind the mutual fund company paying this fee is to ensure that the financial advisor continues to provide service to the purchaser of the fund. These fees could range from 0.25% to 1% every year. Trailer fees form part of the fund’s management expenses. Consequently, they dilute your return.
The mutual fund company typically has other expenses as well, and as an investor, you will have to pay your share of the fund’s operating expenses, including its legal fees, custodial fees, and other administrative costs. Of course, these are not charged separately, but will lead to a reduction in your overall return.