Harli’s prior blog post covered some good steps on what you should be considering when hiring a Financial Advisor. An important part of that is having an understanding of the investments that your Advisor recommends when implementing your portfolio. Once you’ve agreed to an asset allocation – how do you go about buying into that allocation?
One important item to understand here is whether or not the Advisor receives compensation for recommending certain investments. At Parsec, we are a fee-only firm which means our sole revenue source is our percentage fee based on the assets we manage for a client. This means we do not receive any compensation through the investments we purchase or sell on a client’s behalf. Other Advisory Firms or Brokers can receive up-front commissions or ongoing annual revenues that vary based on the type of investment they purchase for clients, and we feel this adds an unnecessary bias during the investment selection process.
Along with the importance of knowing if your Advisor is paid based on what they recommend is also knowing how much that investment costs you overall. If you purchase a mutual fund or exchange traded fund within your portfolio you should get a good understanding of their expense ratios to know what that fund costs you on an ongoing basis, and how do their costs impact their performance net of all fees and costs.
At Parsec, we try to limit the overall cost of client investments by tracking the mutual fund costs charged by the investments we recommend. For clients with a larger account size we may buy individual stocks for a large portion of their equity allocation and thus we remove the layer of fund manager costs. Clients will pay a transaction fee to buy or sell the individual stock, but there is no mutual fund expense on those assets – just our annual fee of assets under management.
If when interviewing an advisor you feel like you don’t have a full understanding of the costs of the advice you will receive, or the costs of the investments that will be purchased for you, then ask more questions! If you feel like you aren’t getting an honest answer then that should be a good sign to keep looking around.
Travis Boyer, CFA