Are You Paying Too Much in Total Wealth Management Fees?

There is no such thing as a free lunch.

As you may know, the fees charged by financial services firms have fallen over the last few decades. But, as is always the case, financial services firms have a knack for ensuring they get paid. As fee rates in one service or product come under pressure, they find ways to sustain their revenues.

It pays to know what you are paying for!

Brokerage firms face enormous pressure as individuals have flocked to independent registered investment advisers (RIAs). Recognizing their old commission-based structure was antiquated (and expensive), brokerage firms created alternatives for customers often mimicking the RIA model.

A common alternative that has been popularized over the last few decades is the “wrap fee” advisory program. Under a wrap fee arrangement, the client is not charged commissions. Instead, they pay a flat fee rate based on the assets held at the firm; a similar structure to the RIA. 

I think if you asked most clients in a brokerage wrap fee program: “how much are you paying for financial advice and money management?” Our bet is they would answer: “1%”. Most don’t understand that fee can be just the beginning of the total cost incurred for money management services.

In many cases, once a client joins a wrap program the broker helps the client select managers to actually manage their money, or they recommend a cadre of Model Portfolios made up of pre-selected investment products.

These products could be mutual funds, they could be limited partnerships, or they could be separate account managers who managed individual securities in the client’s portfolio. In all cases, these money managers charge an additional fee.

In mutual funds, the management fee is known as the “expense ratio” and can range considerably. For index funds the fee can be as low as 0.09%, but range to levels above 1%. In actively managed separate accounts, it’s typically 0.5% but can range up from there.

Clients may ignore this added fee because they don’t see a bill. The fee is deducted directly from the account or fund assets. What seems like a 1% fee, is usually higher.

[1] [MW2] Across most of the RIA market, a similar fee structure often exists (remember the brokerage firms copied the RIA model when devising their wrap programs).

Clients of RIAs pay a fixed-fee rate for the assets under management and 1% is common. Then, the RIA helps their clients select mutual funds or separate account managers to manage the funds, and the client pays additional fees to the money manager.

But that’s not all. Brokerage firms and many RIAs find other ways to enhance the fees they are paid. These enhanced fees are generally derived from “selling” products like annuities, exotic investment strategies, limited partnerships, and other illiquid investments. In most cases, the fees paid on these products are significantly higher and difficult to uncover.

According to RIA in a Box, the average advisory fee in 2018 was 0.95%. In the same year, the average expense ratio of a managed mutual fund was 0.76%. This means the average fee paid by clients was still 1.71%.

Nicollet Investment Management, Inc. is a RIA. We’ve structured our business in a way to keep the fees paid by our clients well below the industry, however. When I talk to clients about our fees, I always feel obligated to add that I do not wish to be considered the Walmart of the financial planning and investment world. Our fees are not lower simply to attract people looking to get something cheap.

Our fee rates are set lower because we are structured to handle our client’s needs internally; the firm was built to efficiently deliver the services we offer.

The professionals at Nicollet have backgrounds qualifying them to handle all aspects of the services we provide. We have experienced planners and analysts who understand personal finance, and the issues families face in reaching their goals. We also have investment managers with decades of experience investing in the stock and bond markets.

We do not need middlemen to distribute our service; we do it ourselves.

Neither we nor our clients need to pay middlemen or other service providers to deliver the services we offer. That can significantly lower the price a client pays to get advice and have their money managed.

Our clients pay a fixed fee % based on the types of investments we manage for them and the total amount we manage for them.

We charge 0.50%/year for managing individual portfolios of bonds, and we charge 1.10%/year for the management of our active stock strategies.

Both of these fee rates decline as the asset we manage for a client hits certain thresholds.

Clients who hire us to manage their assets pay no fee for our advice or planning work. If a client only desires our advice and not money management, we charge them a flat rate that they know before we start our work.

We try to keep it simple.

Across all our clients today, based on their individualized mix of stock and bond investments, they pay around 0.75%/year. A full percentage point less than the industry average.

That is not a fee reduction borne from a cheaper service, either. Quite the contrary, we believe we are very detailed in the planning done for every client. That percentage point savings is really the money that others pay outside firms for referrals or money management.

If you are interested in learning more about Nicollet Investment Management and how our fee structure works, please give us a call.

Please click here for important disclosures.

 [MW2] If it is a wrap fee program through an RIA. The wrap fee is inclusive of the custody/clearing charges. This will be disclosed in the firm’s wrap fee program disclosure brochure.