Investment Managing Costs

Investment Managing Costs

Investment managers play a vital role in advising clients and handling their investment portfolios. Many clients cannot do without them and the fees they charge are well deserved, well-earned, completely reasonable and are disproportionately low for the great benefits they provide.

However, some managers do not do justice for their clients with hidden costs that they may not always be aware of.

The typical compensation arrangement is a percentage of the assets under management. This is stated up front and agreed to by the customer. A secondary method of payment are commissions gained by mutual fund sales. Many managers use no-load funds which do not have sales commissions or load funds which charge sales commissions that are credited back to the customer so they do not pay a double fee. There is no problem with this. However, every mutual fund has management fees – some very low such as those with large index funds and some very high – as much as 1.5% of the assets. These are clearly stated in the mutual fund prospectus and are transparent for those that bother to look at the information, but many customers do not look at this or if they do, many understand it.

Customers should be aware that when an investment advisor buys mutual fund shares, there is a double fee paid by the customer – the investment advisor’s fee and mutual fund manager’s fee. Even with reasonable fees, this can be over 2% of assets. Since the average stock (as measured by the S&P 500) pays a 2% dividend, this means that the customer is willing to forgo the dividend to get the “great” management of their advisor. With fixed income, this fee could be more than half of the interest distribution. Are these managers that good?

If clients are aware of and agree to this arrangement, I see no problem. But if they are not aware, then maybe they should revisit their arrangements and ask for a clear recitation of what their costs are and their benefits.