A lot of people have money managers, private bankers or financial advisors. One of the reasons why we started Stansberry Churchouse Research is that we believe – with the right tools and insight – everyone can take care of their own finances. And part of this is helping you protect yourself from “experts” who want to separate you from your money.
If, though, you do employ someone to help you take care of your finances, you need to be sure that you’re not being ripped off. Below, Mark Ford shares an essential question that you should ask that person – if you don’t know the answer already.
What you should ask your private banker or financial advisor – today
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Your private banker or financial advisor makes his or her money by selling you a service. If you don’t know what exactly he’s doing for you or how much he’s charging you, you are vulnerable. And yet, most investors, probably eight out of 10, don’t know these things.
If you hire a plumber to fix a leaky faucet, you know exactly what he’s doing and how much you’re paying him. But when your money manager recommends something—some sort of amazing new investment that guarantees your principle while simultaneously giving you an upside equal to the market, you probably only vaguely understand the transaction and may have no idea that he’s being paid multiple times for selling you that deal.
The financial industry is very, very good at three things:
- Inventing financial products that are difficult to understand.
- Hiding the fees they charge their customers.
- Making sure that they get paid even if their customers lose money.
There are plenty of regulations in place that are supposed to make such costs transparent, but most of the disclosures are in small print and peppered with legal terms.
I’m not suggesting that all fees and charges are unfair. In fact, decades of consumer advocacy have reduced the number and types of tricks brokers, financial advisors, and money managers use to fleece their clients.
But there are still things to watch out for…
Some money managers and financial advisors don’t offer much to their clients. They’ll scratch the surface but, in the end, only provide a narrow range of financial services. Make sure what they offer fits your needs and includes diverse asset allocation, stock and bond recommendations, reporting and so on.
Most of them will also charge you a fee for any financial advice. And some will collect commissions on any transactions. All of a sudden, it’ll start costing you to do anything with your managed money – including just talking about it.
Another one of the problems with money managers and financial advisors is that they have a predisposition for mutual funds. They like mutual funds because they are easy. But as you know, mutual funds are very expensive.
And that’s not all… With a money manager, you are likely paying other fees, too. My colleague Tim Mittelstaedt at the Palm Beach Research Group has a good friend with a UBS-managed account. Tim studied the fine print, and this is what he found:
- A 1 percent annual fee on the portfolio paid to the manager
- An average 1.44 percent annual fee on the 15-20 mutual funds the manager had put his friend into.
The fine print showed other fees that were impossible to decipher:
- Omnibus Processing Fees
- Trailers and 12-b Fees
- Networking Fees
- Finders Fees
- Account-Services Fees for Affiliated Fund
- Revenue-Sharing Payments
So Tim’s friend is paying 2.44 percent in disclosed fees – and he may be paying even more if you consider the hidden or hard-to-decipher fees.
There is an argument to be made that fee-only financial advisors and/or money managers are better because you don’t have to pay transaction costs. This is not necessarily true. Your account could be billed for certain transaction costs separately. The money manager doesn’t receive this fee, but you pay it.
The only way to know what you are paying a financial advisor and/or money manager is to write them a letter asking them to disclose all costs clearly and fully.
If you use a money manager or financial advisor, you should expect him to be completely forthcoming and transparent about what you are paying for. If you aren’t sure, the first step is to tell him in writing, “Please send me a clear and comprehensive account of all charges, fees, commissions, and other costs I am paying for your service.”
And ask him to copy his manager on that message.
If you are ever told, “there is no commission on a purchase,” you are speaking to a liar. It may be true that no actual commissions (as defined by the industry) are being charged, but you can be sure that there are other charges, either embedded in the transaction or put through to you as “management fees”.
As with stockbrokers, there are some situations in which you may be happy to pay the fees they are charging. And there are certainly financial advisors and money managers who are smart and caring and do a good job.
But you need to know exactly what the costs are – immediately and over time.
Then, and only then, can you decide if these sorts of services are good for you.
Article by Mark Ford, Stansberry Churchouse