Wealth Management Fees: What You Need To Know


Wealth Management Fees: What You Need To Know

When it comes to the fees you are paying your financial advisor, what you don’t know can hurt you – especially over the long haul as seemingly small fees can add up and take a big bite out of your investment portfolio over the years. Here we break down the different types of fees that financial advisors typically charge.

Published on 7 August 2017

Wealth management is a service that financial institutions offer to high net worth or high-income clients. Wealth management can involve a range of services including financial and investment advice, accounting and tax services, retirement planning, and sometimes estate planning. The services wealth management professionals provide can be invaluable in terms of helping you to achieve your financial goals, but they always come at a cost.

Wealth management fees are a complicated issue. There isn’t a standard, simple fee structure in the industry – fees vary significantly from advisor to advisor, and in many cases clients don’t always understand exactly what they are being charged for.

And wealth management fees are an important, high-stakes issue as well. Indeed, these fees can accumulate over the long term and take a big chunk out of your investment portfolio.

Before entering into a formal relationship with a financial advisor, it is imperative to ask them for a clear explanation of how they are compensated and detailed breakdown of their fee structure and schedule.

Many financial advisors will try to simplify things for you by telling you that you will be paying only one fee – but this, in reality, is not the case. Under the umbrella of wealth management fees are financial advisor fees, mutual fund fees, exchange-traded fund (ETF) fees, brokerage fees, and even hidden fees.

To give you a better understanding of all of the costs involved in wealth management, we have broken down the different types of fees that financial advisors typically charge:

financial advisor fees

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This is a fee that you pay on your total assets under management (AUM) to your financial advisor – to not only manage your investments, but to offer financial advice and planning.

Generally speaking, there are four different ways financial advisors charge fees:

  • A percentage of assets under management (AUM), typically between 0.7% and 2% per annum. And the more assets you have under management, the lower the fee.
  • A fixed annual fee – a pre-determined percentage based on the value of the assets that are being managed on your behalf.
  • Commissions they make from financial or insurance products you buy through them. These usually take the form of front-end sales loading charged on a mutual fund, a surrender charge on an annuity, or a commission paid directly to the advisor from the investment company.
  • An hourly rate.

Some financial advisors utilise a hybrid financial advisor fee structure, and combine aspects of percentage of AUM, fixed, commission-based, and hourly rate fee systems.

It is essential that you take the time to find out which type of fee structure your financial advisor uses before engaging them.

other fees

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In addition to the main financial advisor fees highlighted above, there are various other fees that you may have to pay to cover the cost of various transactions in your account as well as general account management and maintenance.

Mutual Fund Fees

If you investment portfolio contains mutual funds, you will – as a shareholder of that fund – have to pay mutual fund fees. Mutual fund fees usually range between 0.5% and 1% of the assets under management. You can usually find a detailed breakdown of the fees a mutual fund charges in its prospectus.

Exchange Traded Funds (ETF) Fees

ETFs track an index, a basket of securities, currencies, bonds, or a commodity. Unlike mutual funds, they have a higher daily liquidity and are subject to price changes throughout the trading day. They also typically have lower fees than mutual funds – averaging around 0.5% of assets – making them a highly attractive investment vehicle.

Brokerage Fees

These fees are usually paid directly to your financial advisor whenever they buy or sell an investment for you. Some brokerages charge annual fees, some don’t, so make sure you ask. More specifically, ask if they charge for managing your account. If they do it should be in the US$50 to US$75 per year range.

Other brokerage fees may include inactivity fees, US$50 to US$200 per year, research and data subscriptions, US$1 to US$30 per month, trading platform fees, US$50 to US$200 per month, paper statement fees, US$1 to US$2 per statement, and account closing or transfer fees, US$50 to US$75.

Hidden Fees

All of the above fees form part of the management expense ratio, or MER. Your financial advisor may tell you that as an investor you don’t have to pay the MER, and that it’s an expense that the institution actually pays on your behalf. This is not true. Although all institutions pay the MER out of their own assets, in order to recoup that particular fee, they reduce the return that you would have received from that actual investment. It’s a somewhat sneaky practice, but totally legal.

what do you pay in fees over 30 years?

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If you invest a modest US$500,000 as an opening investment, and leave it with a wealth management firm for a period of 30 years, you will pay, on average, US$1 million in fees. If your investment is outperforming the market every year by 2%, then it’s worth it to pay fees in excess of US$10,000 per annum.

Global financial institutions are competitive, and you may be able to reduce your fees – in some cases by as much at 80% – just by talking to a financial advisor and negotiating before you agree to invest your money with them.

The bottom line

In order to build your wealth you have to invest your money in vehicles that have the potential to earn strong rates of return. Having a clear picture of the costs involved allows you to invest freely knowing what charges are in store for you.

When meeting with a new financial advisor, make sure you ask them to show you a detailed breakdown their fee structure and explain this to you so that you have a thorough understanding of the costs of their services before you hire them.