Hidden Fees When Using a Financial Advisor
AUM (Assets Under Management) Fees
Explanation
Financial advisors charge a percentage of the assets they manage, typically ranging from 0.5% to 2% per year. For a $100,000 portfolio, a 1% AUM fee equals $1,000 annually.
Probability to Save
Low to MediumWhy and How
Consider fee-only advisors who charge flat or hourly rates. If using an AUM-based advisor, negotiate a lower rate if your portfolio has grown or if you’ve been a long-term client.
Fund Expense Ratios
Explanation
Mutual funds or ETFs recommended by advisors often carry expense ratios ranging from 0.05% to 2%, which are deducted directly from investment returns.
Probability to Save
Medium to HighWhy and How
Request low-cost index funds or ETFs with expense ratios under 0.1%. If already invested in high-fee funds, ask for a portfolio review to switch to cost-efficient options.
Trading Fees and Commissions
Explanation
Advisors may charge $$5 to $$50 per trade, even with discount brokers. Active management can result in higher trading costs.
Probability to Save
HighWhy and How
Use commission-free trading platforms or accounts. Robo-advisors can also provide cost-effective, fee-free trade management.
Annual Account Maintenance Fees
Explanation
Some advisors charge an annual fee of $$25 to $$100 for account administration, regardless of performance.
Probability to Save
MediumWhy and How
Seek fee-free accounts or ask your advisor to waive the fee based on your account balance or investment behavior.
Financial Planning Fees
Explanation
Advisors may charge $$100 to $$2,500 for services like retirement or tax planning, depending on complexity.
Probability to Save
Medium to LowWhy and How
Opt for flat-fee planners or robo-advisors for automated, low-cost planning. Negotiate for partial planning services if full planning is unnecessary.
Exit or Termination Fees
Explanation
Leaving an advisor or transferring assets may incur exit fees ranging from $$50 to $$200.
Probability to Save
MediumWhy and How
Inquire about fees before hiring an advisor. Negotiate or seek fee-free transfers when switching firms.
Inactivity Fees
Explanation
Accounts with no trading or activity may incur fees of $$10 to $$50 per quarter or year.
Probability to Save
HighWhy and How
Set up automatic contributions or schedule regular reviews to avoid inactivity fees. Request waivers if you plan to increase activity.
Referral Fees
Explanation
Advisors may receive hidden commissions for recommending specific products, typically 1% to 3% of the product’s value.
Probability to Save
MediumWhy and How
Ask your advisor if they earn referral fees. Fee-only advisors avoid conflicts of interest and recommend products solely in your best interest.
Performance Fees
Explanation
Performance fees are 10% to 20% of returns exceeding a benchmark and are charged on top of AUM fees.
Probability to Save
LowWhy and How
Avoid performance fees by using passive management strategies like index funds or ETFs. These don’t typically involve performance-based costs.
Advisor Fee on Uninvested Cash
Explanation
Advisors may charge 0.5% to 1% annually on idle cash in your portfolio.
Probability to Save
MediumWhy and How
Request that idle cash be invested promptly or moved to low-fee, interest-bearing accounts. Consider cash sweep programs to automate cash investments.
Account Transfer Fees
Explanation
Transferring your account to another advisor or brokerage may cost $$50 to $$150.
Probability to Save
MediumWhy and How
Seek firms that offer free transfers or rebates. Negotiate transfer fees if switching to a new provider.
Fees for Rebalancing the Portfolio
Explanation
Portfolio rebalancing may incur a flat fee of $$50 to $$150 or a percentage of the portfolio value.
Probability to Save
Medium to HighWhy and How
Ensure rebalancing is included in your advisor’s service. If not, negotiate to include it or reduce costs.