by Jac M. Arbour CFP®, ChFC®, President
J.M. Arbour Wealth Management
For the most part, people know what they pay per month for their mortgage, their car, property tax, etc. However, the same does not seem to hold true for their investments. We always ask the attendees at our monthly educational workshops (and our clients in personal meetings) if they are aware of their exact costs. It is extremely rare that someone does.
There are clearly reasons why 99 percent of the people we ask don’t know, and I believe the main reason is quite simple. Investment costs, management fees, expense ratios, loads on mutual fund, and other internal costs are not always the easiest to identify, nevermind understand.
If you own mutual funds or are considering purchasing some, be sure you know the “load” on each. The load is essentially a commission you are going to pay. Some mutual funds don’t have a load, and others have load fees averaging almost 6 percent. In addition, mutual funds come with what is called an “expense ratio.” This is an internal fee that helps pay the money managers and their teams to manage the fund.
Exchange traded funds (ETFs) and index funds tend to have lower costs than mutual funds; many people seek out such types of investment for this reason alone. With ETFs, which are passively managed, you do not have the active oversight given by fund managers, so it makes sense that the costs are lower.
Most people are coming to the conclusion that it is kind of important to understand what they pay for investment advice, and they want to know. I would encourage you to ask your advisor how much you are paying (or have already paid).
The fee-only investment advisory model is currently gaining major traction. It has been around for a long time, but after the Department of Labor made some noise a couple years ago about investment costs, advocating that advisors should have a fiduciary responsibility to their clients, many more people are now paying attention.
In the fee-only model, you simply pay one, flat, easy-to-understand annual fee that is equal to a percentage of your assets being managed. There are no hidden fees or expenses with this model, and it also ensures that you advisor is incentivized to grow your money, and to protect it when the markets cycle the other way.
Here is what I promise: When you have all the information, you will be able to make better decisions.
See you all next month.
Jac Arbour CFP®, ChFC®
Jac Arbour is the President of J.M. Arbour Wealth Management and can be reached at 207-248-6767.
Investment advisory services are offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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