Why am I talking about how I and other financial advisors are compensated? Because – I’m kind of mad.
Let me back track… A new client of mine had told me about an annuity she had for the last 7 years. The performance was poor, her income from it had never increased, and she had a feeling that there were high fees, but she couldn’t tell. She felt in the dark.
So, we called together to get an explanation of the fees…
SHE WAS PAYING A 4.5% ANNUAL FEE! My mouth literally dropped open when I heard it.
You might think to yourself… um? Is that high? Is that low? What does that even mean?
It means that every year, these financial advisors were taking 4.5% of the value of her annuity. For reference, the HIGHEST fee at my firm is 1.5% and it goes all the way down to 0.5%. The other company wasn’t actively providing her advice, they weren’t providing any specialized services, there weren’t any special riders that made the annuity exceptional… it was just a truly ridiculous and predatory fee.
Over the whole period, they paid themselves more each year than they were actually paying her in annuity income.
Some financial advisors and professionals avoid talking about their fees. They might brush them under the rug and pretend they don’t exist. While I wish everyone got free financial advice, that just isn’t the case.
You are being charged.
However, if you are like many investors, you have no idea what that charge is. You might not even know where to look to find it! Whether it’s a 401(k), IRA, brokerage account, or annuity – there is a fee somewhere.
Here are common sources of fees for different kinds of financial products and advice:
- Commissions: Some professionals earn money based on the individual transactions that occur – the number of investments you buy, the type you buy, or the type of product you are sold (insurance, annuities, etc.). It is often an upfront payment for what you are getting, but it can also be reoccurring.
- 401(k)s often have 3 kinds of fees: investment fees, administration fees, and service fees. You always pay your own investment fee. You just don’t see the fee because it comes out of the performance of your investment choice. Plan administration fees are sometimes covered by your employer. Other times, you will see it as a debit from your account annually or quarterly. Service fees are different for each plan, but you would see it as a debit on your account as well.
- Fee-only planning: spoiler, this is me: When working with Hixon Zuercher, you pay a percentage of your investable assets in fees. If your assets go up, your dollar fee goes up. If your assets go down, your dollar fee goes down. When working with this kind of financial advisor, you should see the fee deducted from your accounts on your quarterly statement.
One of my greatest concerns about the financial industry is that people have no clue what they are paying for services. They assume it might be fine, they don’t know how to find out, or they don’t want to ruffle feathers by asking. Next thing you know, 7 years have gone by, and you have been stuck with a financial product you don’t want, know nothing about, and have paid way too much for.
Again, I just continually run into situations where people have been poorly informed, and it was to their detriment. Treat yourself fairly by doing the work necessary to understand the type of service you are receiving – and paying for! You are worth the effort!