These financial adviser fees pinch your portfolio - and 2 questions can stop them

By Morey Stettner

From revenue-sharing 'kickbacks' to interest on idle cash, hidden costs may be eroding your returns

What you don't know about investment fees can hurt your portfolio.

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When you hire a financial planner, you should know how the adviser gets paid. Typically, you will either pay a flat fee or a percentage of assets under management.

It's what you don't know that can sting.

There are many fees tied to investment accounts - some imposed by advisers and their account custodians, others not - that affect returns. It isn't always easy to identify every cost.

"Investment costs are more transparent than they used to be," said Trevor Gunter, an Atlanta-based certified financial planner. "But many clients still do not understand every fee. The advisory fee is usually the one people know about. The fees that get missed are often layered underneath it."

An advisory fee covers the cost of services provided by the financial planner and support staff. A fee-only adviser is paid only on what you pay their firm. A fee-based adviser charges fees but can also earn commission from selling products like annuities or life insurance.

If you want your adviser to manage your investments and not just provide financial-planning advice tied to basics such as budgeting, retirement and taxes, then you may pay a percentage of assets under management.

But some fees fly under the radar. Consider where you park your cash in your investment account. Large financial-services firms such as Fidelity and Vanguard offer money-market funds. For example, Fidelity Government Cash Reserves [FDRXX] charges 0.37% and Vanguard Federal Money Market Fund [VMFXX] charges 0.11%.

Advisers should also explain that if they collect a percentage of assets under management, then the cash that sits in your account is part of your total managed assets. That means you might wind up paying a percentage of that cash, perhaps 0.50% or more, to the adviser's firm.

"Some of the easiest fees to overlook are cash-related fees," Gunter said. "A client may be paying an advisory fee on idle cash or money-market holdings, while the custodian is also earning a spread on that cash in the background. That may not feel obvious to the client, but it still affects outcomes."

You'll also want to track the expense ratio of each ETF or mutual fund in your portfolio.

"A fund that costs .03% and one that costs 1.00% may both sound small in a single year," Gunter said. "But over time, that gap can have a very real impact on long-term compounding."

Another cost you might not know about: Your advisory firm's relationship with a financial-services company can involve placing client money with that company in exchange for payments to the adviser for recommending that company's products (such as mutual funds). This so-called revenue-sharing arrangement creates a conflict of interest.

"It's basically a kickback," said Sara Grillo, a New York City-based marketing consultant and chartered financial analyst. "You don't get a bill. It's a silent fee."

You can check an adviser's Form ADV and Form CRS for disclosures pertaining to potential conflicts. (Advisers registered with the Securities and Exchange Commission must file these forms.) To obtain these free forms, ask the adviser or go to the SEC's website here. Enter the adviser's name, scroll down to "Current Registration(s)" and click on the firm name.

A similar cost can arise if your adviser uses a specific broker-dealer or other financial firm to place trades on your behalf. In return, the broker-dealer may provide the adviser with research tools or software related to financial planning or compliance.

"The client's trading generates commissions that help pay for these tools that the adviser benefits from," said Effie Antonoudi, an assistant professor of financial planning at the University of Georgia. "It's a soft-dollar arrangement." She suggests asking your adviser two questions:

-- Is your firm receiving any compensation, direct or indirect, from any of my investments?

-- Can you provide a written all-in cost estimate for your investment management and financial planning services, including all fees?

If your adviser is affiliated with a big bank or other large financial firm, the institution may urge its advisers to cross-sell its product offerings, such as loans and annuities. While those products might meet your needs, they may come with higher costs than if you shopped around.

"Firm compensation structures incentivize potentially good advisers to lead clients into bad structures," said Noah Damsky, a Los Angeles-based chartered financial analyst. "Big banks and firms that offer multiple ancillary products, including insurance and lending, can choose their own firm's products for clients."

He urges consumers to ask their advisers, "How are you compensated and incentivized?" before accepting their recommendation to buy a particular financial product. Said Damsky: "Incentives drive actions."

-Morey Stettner

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