At the Financial Enhancement Group, The Fiduciary Focus is our proprietary method for evaluating how a portfolio is doing at any given time. A fiduciary, by legal standard, has to treat your money as if it were their own and if they were in your situation. Many families don’t have fiduciary relationships thus you need to be aware that these responsibilities fall on your shoulders.
We have discussed risk and volatility in a previous article within this series. The focus of this column will be the fees and expenses within your portfolio at a given time. The financial industry tosses around these terms in various ways. For this discussion, we will call a “fee” anything that is a known cost and an “expense” a certain cost, but of unknown amount on an annual basis.
Think of a “fee” as what you paid to buy your home. There were known numbers like cost, property taxes, utility bill estimates, and even insurance. You could use those numbers to determine a known monthly payment.
You would also have the costs of operating the household like taking care of the yard and the occasional repair to a leaky faucet or even replacing the roof. We all know these costs exist and can be substantial from time to time. That is why we get inspections on our homes before we buy them. If anything major needs attention we want to know about it ahead of time. After we buy our homes we save up for the major repairs.
The known ”fees” that exist in most investments come from paying the money managers and for those who buy products, in the forms of commissions paid. You may be paying the broker, the asset manager and the custodian all known fees. Unlike a truth in lending statement for a home, you need to ask about these fees upfront as they will impact your returns. Know what you are paying for and what you are provided in return. Generally, that is far more than what you are paying the broker themselves so ask for the detailed breakdown.
The operations cost that change on any given year includes trading cost, marketing cost for mutual funds which is another form of commission and additional operating expenses.
After making a known list of fees and anticipated expenses, ask questions regarding ongoing service and evaluations of the portfolio. Put into writing your expectations so that everyone is clear on who does what regarding your retirement portfolio.
Fees can get a bad “wrap” – pardon the pun for those of you who understand “wrap” accounts. Nothing is free but there should be a presumption of exchanged value for fees that are paid. If your portfolio hasn’t had an “inspection” as you would on your home before buying then perhaps it is time for that examination.
Certainly, before buying a product or making an investment change you should go through the fee inspection exercise. Yes, it takes time and effort, but your retirement is worth it. The hidden expenses can be mind-boggling.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see our Disclosure page for the full disclaimer.