Prospective clients often wonder about costs, but don’t know exactly what to ask. The question we would like prospective clients to ask is “what will my total costs be and what portion of that will be paid to your firm?” along with an equally important question of “how do these total costs you propose compare to the total costs I am paying now?”
My experience is that most prospective clients we meet don’t know how much they pay or how they pay. So let’s get about explaining costs.
Key concept # 1- There can be costs both “inside” and “outside” the investment product (and here we are referring to products such as mutual funds).
- The “inside” costs are usually found in the fine print of a lengthy prospectus or some similar document. As long as the investment product is owned these “inside” costs are paid. Also understand that sellers of investment products often get paid a portion of these inside costs by the company that created the investment. To give a sense of the range of these costs, we see them run from under 1/10th of 1% up to well over 2% (or more than a 20x difference). Our firm’s view is to keep these “inside” costs as low as possible.
- Inside costs would also include commissions that become part of the investment into the product. The investment industry has seen a significant change over the past 25 years where commissions were the most significant such cost, to where today they are very small or non-existent in many cases.
- The “outside” costs are fees paid to advisors, brokers and others that are generally separately stated and collected. Typically the advisor or broker is charging to help the investor achieve their goals (this may or may not include planning services but will almost always include their investment work).
Key concept # 2– There can be charges for a variety of additional services that are key to accomplishing family goals, but not directly part of the investment program cost. These services should be evaluated in terms of what value-add they bring to the client. Examples of such costs would be financial planning fees and trustee fees.
Key concept # 3- Some costs are very real, but somewhat indirect. For example a portfolio that is very tax inefficient (i.e. spins off a lot of taxable income) would add an additional layer of cost for a high income taxpayer who is taxed at the top federal rate of 39.6% plus additional 3.8% net investment income tax. Missed planning opportunities, such as an overlooked Roth IRA conversion or a missed estate planning step also have their own layer of cost.
Our firm is always happy to talk about costs as we know this is foundational to value. We also know that what services are delivered for those costs is equally foundational to value, but that is the subject of a separate and future post.
No forecast can be guaranteed. The views expressed are those of the Payne Wealth Partners Investment Committee and are subject to change at any time. These views are for informational purposes and should not be relied upon as a recommendation or solicitation or as investment advice.