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X% of fee on portfolio value and commission on each trade.

My adviser told me that fee will be x% of asset every year. Now I see commission charge also on each trade. How I do handle this.

Thank you John Woo

Dec 21, 2013 by John from Burlington, VT in  |  Flag
6 Answers  |  6 Followers
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2 votes
Rich Winer Level 20

John, I would first suggest that you ask your advisor for a detailed explanation of his (or her) fee schedule, including what fees and expenses you are responsible for paying. It is not uncommon for an advisor to charge an annual percentage fee on top of commissions and transactions fees you may pay for the purchase and sale of stocks, mutual funds or other investments. It is also not necessarily unfair for your advisor to charge a management fee on top of other fees and expenses. For example, when I buy stocks or ETFs in my clients' accounts, the commissions are paid to TD Ameritrade, not me or my firm. When I invest my clients' money in mutual funds, each mutual fund charges a management fee. Because I receive no payments from the brokerage firms or fund companies with which I do business, my management fee is how (and the only way) I am compensated for my advisory and management services.

The explanation your advisor provides should be consistent with fee schedule and other information on fees in his or her management agreement.

Some advisors charge a "wrap fee" where management fees and trading costs are all bundled into one fee. Sometimes the advisor will split such fees with a brokerage firm or even with another advisor. The details of this arrangement must be disclosed in a "wrap fee brochure." For some of my investment management programs (i.e. my Dynamic Growth Stock Portfolio), my firm pays the trading costs, which reduces how much we earn from our management fee. We do this because our Dynamic Growth Portfolio strategy can involve an above average amount of trading in volatile market environments where the trading is needed to preserve and protect our clients' capital. We pay the trading costs because we want the clients to understand and focus on the benefits of our trading process rather than what they are paying in fees (which in this case is nothing). This type of arrangement (where the advisor pays the trading costs) also fall under the definition of a "wrap fee account."

I hope this information has been helpful. The most important advice I can provide is to talk with your advisor, make sure you understand and are comfortable with how he gets paid, and make sure that is explanation is consistent with his management agreement, wrap fee brochure (if applicable) and Form ADV (if applicable). Form ADV is a disclosure document the Registered Investment Advisors are required to provide their clients prior to the inception of their account.

1 Comment   |  Flag   |  Dec 21, 2013 from Woodland Hills, CA
Rich Winer

Sorry for the typos. I wish there were a way to edit them out after posting.

Flag |  Dec 21, 2013 near Woodland Hills, CA

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2 votes
George Cones, JD Level 20


I am not sure of your exact situation. If your adviser is acting as a Registered Investment Advisor (RIA), then as a fiduciary he likely should only receive the fee you pay him and get no commissions or other fees (like 12 (b)(1) fees or payments from third parties). That said, the custodian (Schwab, Fidelity, etc.) does usually charge a fee for trading. Each custodian has different fee schedules. The bottom of the cost of the trading range for a custodian is often 8 to 10 dollars or less for most trades. Some custodians charge a bit more if you don't accept electronic correspondence from the custodian. If your adviser uses institutional mutual fund share classes the custodian may charge more because they do not get the 12(B)(1) fees or other fees often paid by the fund.

If you compare the costs of retail mutual fund A shares, B shares and C shares, for example, sold by brokers the fees built into the broker sold share classes often (if not usually) more than the trading costs charged by the custodian and your advisers fee combined. If you look on my page I make an attempt to try to explain share classes.

You should have your adviser confirm in writing that he receives no compensation other that the fee you are paying him and he is acting as a fiduciary. Get him to explain what all the fees are and how they would compare to broker sold products. There may be a perfectly valid explanation for the trading costs.

Comment   |  Flag   |  Dec 21, 2013 from Wilmington, DE

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John, I would suggest that you directly ask your advisor about this. In some cases, advisors charge a % of assets and use a custodian (like Schwab or TD Ameritrade) that charges a "commission" for trades - in this case the custodian (not the advisor) keeps the commission (trading fee). In other cases, advisors charge a % of assets and also then make a commission on a trade. Usually these are brokers that may not be working under the fiduciary model. There can be some conflict of interest present in this 2nd arrangement as the advisor may be tempted to invest your money in a way that also pays a commission to them in addition to the % of assets. Again, I would suggest you seek clarification directly from your advisor.

Comment   |  Flag   |  Dec 21, 2013 from Harrisburg, PA

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It's unusual for an advisor to earn both a commission and charge a fee for the same investments. If you see that you are paying both, ask your advisor about it. Chances are that you are paying your advisor a fee (probably a percentage of the assets under management) and the custodian is charging a commission or "trading fee". This is how it works in my firm.

Comment   |  Flag   |  Jun 27, 2014 from La Verne, CA

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I think the others have answered your question in some detail. One of the things we cover very thoroughly with any client before we accept an engagement is how we are compensated. When people get an unexpected fee once a relationship starts, it can lead to suspicion that he has not been truthful or fully transparent. In our case, we are very cost conscious so we use no-load or load-waived mutual funds. Since we left one of the “big box” brokers, our clients - who were used to paying hundreds of dollars to buy stocks - find the very low commissions charged by Schwab on these transactions to be a great relief. By the way, this is how custodians like Schwab get compensated for their record keeping, printing and issuing statements, and executing trades. This is Schwab’s source of revenue. Our fees are the only source of our revenue.

Comment   |  Flag   |  Aug 28, 2014 from Suffolk, VA

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Layton Jacob Cox Level 11

You fire them because they are either poor communicators or don't have your best interest in mind.

Comment   |  Flag   |  Aug 28, 2014 from Tucson, AZ

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