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Investment Managing Costs

August 15, 2013

Investment managers play a vital role in advising clients and handling their investment portfolios.  Many clients cannot do without them and the fees they charge are well deserved, well-earned, completely reasonable and are disproportionately low for the great benefits they provide.

 

However, some managers do not do justice for their clients with hidden costs that they may not always be aware of.

 

The typical compensation arrangement is a percentage of the assets under management.  This is stated up front and agreed to by the customer.  A secondary method of payment are commissions gained by mutual fund sales.  Many managers use no-load funds which do not have sales commissions or load funds which charge sales commissions that are credited back to the customer so they do not pay a double fee.  There is no problem with this.  However, every mutual fund has management fees – some very low such as those with large index funds and some very high – as much as 1.5% of the assets.  These are clearly stated in the mutual fund prospectus and are transparent for those that bother to look at the information, but many customers do not look at this or if they do, many understand it.

 

Customers should be aware that when an investment advisor buys mutual fund shares, there is a double fee paid by the customer – the investment advisor’s fee and mutual fund manager’s fee.  Even with reasonable fees, this can be over 2% of assets.  Since the average stock (as measured by the S&P 500) pays a 2% dividend, this means that the customer is willing to forgo the dividend to get the “great” management of their advisor.  With fixed income, this fee could be more than half of the interest distribution.  Are these managers that good?

 

If clients are aware of and agree to this arrangement, I see no problem.  But if they are not aware, then maybe they should revisit their arrangements and ask for a clear recitation of what their costs are and their benefits.

4 Comments leave one →
  1. Robert Nagler permalink
    August 15, 2013 11:56 am

    Hi Ed you should know the commission that is charge on stock transactions also the fee;s]
    that the funds charge This added expenses to the fee that the investment manager
    charges.

  2. August 15, 2013 1:41 pm

    Bob is 100% right!

  3. August 15, 2013 11:09 pm

    A good investment manager, in my view, will not charge a fee on assets that are invested in mutual funds (some don’t charge it for government securities as well). After all, the investment manager is charging the fee for managing the assets – if the mutual fund manager is managing that portion invested in the mutual fund, why should your advisor be charging you? Typically, a good asset manager will not invest in mutual funds unless there is some trading cost savings to doing so. Additionally, when looking at a mutual fund be aware of sales load yes, but also – look at the Expense Ratio rather than just the management fee. The Expense Ratio covers the investment advisory fee, the administrative costs, internal fund trading expenses, distributions costs (i.e., 12b-1 fees), and all other operating costs – which on certain funds, especially some fixed income funds, commodity funds and alternative investment mutual funds, can be very high. Just my 2 cents.

    • August 19, 2013 2:17 pm

      Great comment Tony. More information for investors to be aware of and ask their investment advisors about.

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