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Carla Fried: What clients get wrong about their financial adviser

Carla Fried, on

Published in Home and Consumer News

With your financial life resembling a three-dimensional chess game — bills, retirement saving, sending kids to college — working with a financial adviser can be a very smart move.

What you pay for that help, unfortunately, can also be a bit of a challenge to figure out. A recent survey by State Street Global Advisors found that 60% of people working with an adviser believe the management cost of their investments (funds, exchange traded funds) is included in the fee charged by the adviser.

It isn’t.

The hidden expense that adds up

Every mutual fund and exchange traded fund (ETF) you own, whether it’s in your 401(k) or an account your adviser manages directly, charges an annual fee known as the expense ratio. Expense ratios are hidden and never show up as a line-item expense on any investment statement. They are deducted from the raw performance of a fund or ETF; the return you see in your statement has been reduced by whatever expense ratio was charged.

The cheapest expense ratios can be less than 0.10% for index funds and ETFs, though for actively managed funds the norm is more than 0.60%.


When you’re working with an adviser who manages a portfolio for you that includes mutual funds or ETFs, you need to add the cost of those portfolios to what the adviser charges to land at the all-in fee.

All-in fees, all important

Many advisers who manage investment portfolios work on an “assets-under-management” arrangement with clients. According to the 2020 Inside Information Fee Survey, for clients with assets of $500,000, about three of four advisers charge at least 1%. That’s just for their services. If they use funds and ETFs, the underlying expense ratios are an additional fee clients pay — to the company managing the fund or ETF.

A few years ago the Inside Information Fee Survey reported that the average expense ratio for portfolios managed by advisers was an additional 0.50%. Given the encouraging trend toward lower-cost funds and ETFs, it’s likely that the expense ratio average for adviser-managed portfolios may be lower today.


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