Excessive Investment Expenses

When do expenses become excessive? There is no easy answer. There are too many variables:

• What services do you receive for the expense?
• How experienced is your financial advisor?
• How much money do you have invested?
• How are your assets invested?
• What is your performance before and after expenses are deducted?

Financial Advice & Services

There are five critical questions you should ask professionals who provide financial advice and services. Make sure the advisors document their responses to the following questions: 

• How are you compensated? Fee (hourly, fixed, asset-based) or commission?
• What are your combined expenses as a percent of my assets?
• Do you have a minimum fee?
• Who gets the money that is deducted from my accounts?
• What services will I receive for the expenses?

Advisor Experience

It stands to reason more experienced advisors charge more than less experienced advisors.

• What are your years of experience?
• Do you have any college degrees?
• Do you hold any industry designations?

Your Assets

Just about every advisor has a sliding schedule of fees. You should know the fees and the breakpoints for reduced incremental fees. Following is an example of a sliding schedule:

• 1% on the first $500,000 of assets
• .75% on the next $500,000 of assets
• .50% on amounts over $1,000,000

Watch-out for advisors who have minimum fees. You may be paying more than the stated fee schedule.

Investments

You will pay more for active management than passive management (ETFs and index funds). Management of stock portfolios will cost more than bond portfolios. You may pay a premium to advisors who claim they can produce superior performance (get it in writing).

Performance

Your perception of excessive fees will vary based on the performance of your investments. A 2% combined fee does not sound excessive if your gross performance was 20%. It may sound very excessive at 8%. And, it may sound absolutely onerous if your performance was a negative number.

Paladin says.....

You do not control the future performance of the securities or your risk exposure. But, you do control the amount of expense that is deducted from your accounts. Make sure advisors document all of the expenses that are deducted from your accounts and the services you receive for the expenses.