Paul Meloan – Vested Interest

I stopped being shocked long ago when otherwise intelligent, well-adjusted people told me that their financial advisor didn’t charge them. Admittedly it’s rare (maybe 5% of people seem to believe it) but it still happens. So for the 95% of people who no longer believe in the tooth fairy, I’d like to share some ideas about paying for financial advice that we think make sense.

Always think “total cost of ownership”

A useful example may be a car. The purchase price is obvious, but what may be more influential is how much of the car’s value does it hold over time. A car that can be sold after 5 years for 50% of its purchase price may well be less expensive to own than a lesser-priced car that loses 90% of its value. Then one must consider costs of finance charges, fuel, maintenance, storage and insurance. All of these costs are real and should be considered. These comprise the “total cost of ownership” of the car from purchase to disposal.
For investments, we believe total cost of ownership should also be broken out into its components.

Paying your advisor

There is more than one way for an ethical financial advisor to charge for their services. Our firm happens to utilize a formula that charges a percentage of assets that we manage for a client. Our fee is 1% of assets up to $3 million, with lower percentages charged on assets above that. 
Many advisors utilize this approach but have their own formulas on how much they charge on which asset levels. We deduct our fee each quarter, and our clients see a line item on their custodial statement (see below!) that plainly says “Advisor Fee: Aegis Wealth” on their statement.

Who else are you paying?

Almost all investments have some internal expenses. In the case of a mutual fund this is expressed in terms of the total annual expense ratio. This fee is not charged on the statement the way your advisor fee should be, but is rather baked into the return you receive. For example, if a fund’s gross returns on investments are 10% and its annual expense ratio is 0.5% then its shareholders’ return is 9.5%. While many investors understand intellectually that their investments aren’t free, many remain woefully in the dark about how much of their portfolio’s returns are going to their managers and not to them. Good management may be worth paying for, but it’s critical to understand what you are getting for what you are paying.

Separate Managers & Custodians

A client who utilizes a separately managed account will also see a line item of the fees charged by that manager. These go only to the manager, and not to us.
Then there is the question of custodial fees. Since Aegis is not a bank or a brokerage, we work with institutional partners who have actual possession of client assets (in our case, Schwab and Fidelity). You may have noticed these enterprises are not charities! They generate revenue in a variety of ways. For example, if you purchase or sell a mutual fund they may charge a transactional fee ($5 to $50 depending on the fund and the amount). Since most clients have multiple accounts (brokerage, IRA, etc) with multiple transactions these fees can become significant over time if trading is frequent.


Finally, there is your silent partner: the government. Managing assets requires the recognition of profit (that’s the entire goal!) from time to time and that triggers taxes under our current system in a brokerage account. Long-term capital gain is subject to a maximum tax of 23.8% or even higher if you sell assets less than one year old. Most states tax gain as well. Note: a tax-qualified account like an traditional IRA does *not* pay taxes upon the sale of assets but rather when distributions are made from the account. A Roth IRA *never* pays taxes if managed correctly.

The best question to ask a financial advisor about fees

Once you’ve figured out what your investments cost, it’s worth it to dig a bit deeper to learn exactly how your advisor is paid. If you’re working with an advisor now, ask them “Does 100% of your firm’s income come from its clients?” We hope the answer is “Yes! 100%” If the answer is less than 100%, they have some explaining to do.
As fiduciaries, we believe it is critical that we not be beholden to anyone other than our clients and one way we express this is that we do not accept payments from anyone else. As obvious as this may sound, people work for who pays them.  As Steve Ballmer famously said about the internet: “If you’re getting something and you aren’t paying for it then you aren’t the customer, you are the product.”
Our clients are not someone else’s product.
We also do not accept things like junket travel (ask an insurance agent how many trips they’ve gone on that were paid for by insurance companies) or anything above nominal value from non-clients.  We do not solicit or accept referral fees from other professional firms. We do not solicit or accept kick-backs from asset managers. Since the day we opened in 2005 we have operated this way and we believe all professionals should.
Full disclosure: Schwab sent us a box of cookies for the holidays and we ate them. If you would like to send us a box of cookies I’m guessing we will eat those as well. So, cookies are fine, but lobster tail in New York City is a no-go.
Clients understand that nothing in life is free but some things are worth paying for. On your road to financial independence your chances of getting where you want to go require this understanding. If you do not understand the total cost of ownership of your investments and your financial planner you need to learn it. We can help.

Paul Meloan is the co-founder and co-managing member of Aegis Wealth Management, LLC, in Bethesda, Maryland USA. Before Aegis Paul was a practicing attorney as well as working in the tax practice of Ernst & Young, LLP.

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