Stop overpaying your financial advisor
Managing investments can seem daunting. Many people are simply unaware of what they’re paying, especially when feeling uncertain about how things work or even the questions we should be asking. This article will go over two common types of fee structures that are available in Jamaica. I hope you will be able to discern which is best for you and your financial goals.
The most common type of fee you may encounter is the trade fee, which usually involves a commission that goes toward your financial advisor. A percentage is charged per transaction on the account.
For example, to sell your stock in Apple will typically incur a two per cent trade fee of the value of the transaction. Then, as per your financial advisor’s recommendation, to purchase stock in another company will incur another two per cent. As you may notice, this could potentially give your financial advisor the incentive to make recommendations that increase the activity on your account, thus earning themselves more commissions.
On top of that the return on your portfolio now needs to exceed a break-even point of four per cent in order for those two transactions to be profitable to you. Sometimes it works, sometimes it doesn’t. I am not suggesting that all financial advisors are making unnecessary recommendations for their personal gain. However, I am indicating that you should be aware of how much of your returns are eroded by fees and commissions.
Everyone wants no fees, zero risk and double-digit returns. But, if it is too good to be true, it probably isn’t.
The most transparent fee you may encounter is the annual asset management fee. It is charged directly on the value of your portfolio as a fixed percentage. Depending on the arrangement, it is most likely charged quarterly. Therefore, regardless of how many trades are made on your account to buy/sell and reposition, you will not be charged for these transactions.
With this model there is no conflict of interest as it is in your investment firm’s best interest to generate higher returns on your account as this is what will give them higher commissions. When you’re making money, they’re making money.
If you want an actively managed, diversified portfolio that reflects your personal risk tolerance, you should ask your financial advisor about their products under their asset management fee model versus the commission model.
What does “actively managed, diversified portfolio” really mean? “Actively managed” refers to the attention and time that is given to your portfolio by the firm’s Asset Management team.
Imagine the benefits of sending your child to a large school versus a smaller school. The most obvious benefits are the one-on-one attention, the building of personal relationships and the ability to rectify a problem before it has gone on too long. The same exists within an actively managed portfolio. These types of portfolios require consistent re-examination, careful trading and rebalancing.
Since the investment advisory firm has vowed to absorb the cost of these, there is no incentive to overtrade.
The “diversified” aspect speaks to the minimisation of risk through the selection of different types of assets. Most Jamaicans are highly risk-averse. This is understandable, given that we typically have to work a lot harder than those in a developed country, for the same or less income. Therefore, diversification is a strategy that asset managers use to protect their clients’ capital which they have worked so hard to attain.
Make inquiries to your financial advisor about what types of diversification strategies have been implemented for the protection of your investments.
Remember that financial advisors are told to sell the products and services that the firm has because they have quotas to meet. If you have never heard of the asset management model before, it is probably because the firm has not created these opportunities for their clients.
If after further inquiry you decide that you are paying too much in fees, then you should ask your advisor what options are available to reduce fees. A good advisor will be very upfront about asset management fees and ways to ensure that you are getting what you pay for.
If your portfolio is handled under a trade fee model, perhaps lower-cost alternatives need to be investigated. For example, instead of having a portfolio consisting of only mutual funds, you may want to consider adding Exchange Traded Funds (ETFs) and individual stocks to the mixture.
In the end, of course, proper asset management comes down to the big picture. It’s about building the portfolio that is right for you, which should take into account more than just cost, but the risk you’re willing to take on, whether you’re seeking active or passive management, and whether there are other services that you receive in exchange for the fees you pay.
It’s critical that you understand and are comfortable with your management plan, and the best way to ensure that is through education. With this article on fees and fee structures, you have taken the first step in understanding some of the important details about the management of your accounts, which gives you the power to steer your portfolio management in the direction that is right for you.
Alanah Jones is a brand supervisor at Stocks and Securities Limited.