Another Note on Fees
Another important question to ask your wealth manager is, “What are the fees of the underlying investments I will be invested in?” This is an important question because some investment managers will use costly products with high expense ratios. An expense ratio is the fee of an underlying mutual fund or ETF, with some costing more than 1.00%. The fee will be charged annually as long you are invested in the fund. Some fee-based advisors (different than fee-only) may receive commissions on products they sell, which may include mutual funds with high expense ratios; and thereby, presenting a conflict of interest between the advisor and the client.
Other types of fees to look out for include sales charges and redemption fees paid on mutual funds. The former is typical when you buy what is called an “A-share” mutual fund and is sometimes called a “front-load” fee. The latter is typical when you buy a “B-share” and is sometimes referred to as a “back-end load.” These fees can be significant. Depending on the source, load fees average around 5%!
Another fee to avoid are 12b-1 fees. These are fees charged to investors that are used to pay for the marketing and promotion of a mutual fund investment. Do not pay for the marketing and promotion of a mutual fund product!
The average investor is unaware of such fees, and ultimately pays the price. For example, John Smith decides to invest with ABC Financial Management. The firm charges a 1% management fee and allocates the portfolio in a mutual fund with a 0.75% expense ratio as well as a 5% front-load fee. The fund also has a service 12b-1 fee of 0.25%. This ultimately costs the investor 7% the first year out! In year 2, the investor faces a 2% fee given the management fee in conjunction with the underlying investment fees.
3i Wealth Management is a fee-only advisor and does not accept any commissions nor is incentivized to sell any particular products or services. The firm also does not invest in any products with front-load fees, back-load fees, 12-b1 fees, or high expense ratios. The highest expense ratio of any of our underlying investments is 0.15%. There are no other hidden fees.