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Home Blog What Am I Really Paying For My Investments?

What Am I Really Paying For My Investments?

What Am I Really Paying For My Investments?

This is a question that all clients of financial advisors should know the answer to, but unfortunately, we suspect few people really have a good handle on. At First Citizens Wealth Management, we feel that one of the most important things we can do is be very transparent about the fees and expenses associated with being a client of our organization. Here is a brief overview of the different types of costs a client may pay when working with a financial advisor:

Commissions: This was once the most common way of paying for financial services and typically involves paying a transaction-based fee to buy or sell something. Commissions can be expressed as either a percentage of the overall transaction or a flat dollar amount. This type of fee could apply to individual securities, mutual funds, annuities or insurance.

Example: If you buy an “A share” mutual fund, a front-end load is charged meaning you purchase shares at $10.00 per share, the value of the shares the next day is $9.50 assuming a 5% commission.

Back-End Load or Surrender Charge: In addition to the ongoing operating expenses, "B share" mutual funds charge a back-end load. Variable annuities and index annuities often have hefty surrender charges to cover the up-front commission paid to the individual selling the product. If you cash out of the product early the insurance company must recoup the commissions they already paid. If you own the product long enough the insurance company recoups its marketing costs over time. Thus the surrender fee decreases over time.

Management or Advisory Fees: This type of payment method has been gaining popularity over the last decade and involves paying a flat fee for the management of a portfolio. This is usually charged as a percentage of the overall portfolio and is assessed on a monthly or quarterly basis. This method generally allows an advisor to be more proactive in the management of an account or portfolio and allows adjustments to be made over time without significant transaction fees being paid. Oftentimes the advisor or organization managing the money will also take a fiduciary responsibility for the management of those assets and customers may receive other services as part of this fee, including financial, tax, and estate planning.

Example: Your investment is $500,000.00 and you are charged 1% or 100 Basis points meaning $1,000.00 in fees annually.

Investment company fees: If your managed or advisory portfolio includes mutual funds, exchange traded funds (ETF’s) or annuities, you are also paying fees to the investment companies that build and distribute these products. Unlike the management fees above, these costs can be very hard to understand because they are typically not shown on your statement and must be found inside the prospectus or other disclosure documents. 
It is important to inquire as to what type of investments will be held within the account and take note of total fees, not only the advisory fee. Our average underlying expense ratio for a model portfolio is .42%; however, we have seen portfolios averaging greater than 1% pushing total fees above 2%. When you consider the impact over time, not taking into account underlying fund expenses can have a very negative impact on your overall portfolio.

Example: You pay a 1% advisory fee with a portfolio with an average expense ratio of .8%, your total fees are $1,800 annually in a $100,000 account. Compare that to a portfolio with an expense ratio of .5%, your total fees are $300 less per year, or $1,500.00 annually. Over thirty years, that $300 additional expense could add up to approximately $20,000.00 assuming a 5% return.

Custodial Fees: Some custodians will charge an annual flat fee to hold the account with that organization. These vary across custodians and will sometimes be waived once accounts reach a certain dollar amount. Typically, these fees are waived in a managed or advisory account.

When working with a Financial Advisor, you should feel comfortable openly discussing fees and asking questions regarding compensation. If you have questions or would like us to review your portfolio and make sense of your total fees, do not hesitate to contact us at or 641-422-1600. 

Products provided by First Citizens Wealth Management are not insured by the FDIC, are not deposits of the bank and are not guaranteed by this institution; and, are subject to investment risks, including possible loss of the principal invested


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