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The costs of investing (and planning)

Let's face it: the financial services industry hasn't exactly been a beacon of transparency when it comes to the fees you pay. That's slowly changing, but in the meantime, let's arm you with knowledge: what fees are out there, and what should you expect?

Fee-only financial advisor fees

(Yeah, that doesn't roll trippingly off the tongue, but it gets the point across.)

I'm not going to go into the commissions paid to fee-based financial advisors, because hopefully you've already decided to go fee-only. That said, even fee-only financial advisors have varying fee structures, which is good, because different fee structures fit different needs.

So: what's typical?

"Pure AUM" advisors: For a fee-only advisor paid purely by a percentage of assets under management, you should expect to pay around 1% of AUM (with that number going down for people with assets over $1-2MM). Note that for "pure AUM" advisors, this fee pays for both investment management and comprehensive financial planning -- anyone who charges more than 1%, or offers less than ongoing comprehensive financial planning along with investment management, had better have compelling reasons as to why! (And, sadly, there's not often a high correlation between services offered and AUM fee charged; see page 18 of Fidelity's 2016 RIA benchmarking study for an interesting little graph.)

Hourly advisors: for advisors who charge an hourly rate, you can expect $150-$300/hour -- generally what you would expect from any skilled professional.

Flat-fee advisors: for advisors who charge a flat fee, you can generally expect to pay $1000-$5000 for the initial plan, and then $50-$300/month for ongoing services, both of which often depend on the complexity of your situation -- for example, many advisors have different fee structures depending on whether you're single or have a family, or are approaching retirement versus already retired. Generally, this fee covers investment advice ("I recommend putting your 401(k) in these funds"), but not investment management.

Hybrid AUM/flat-fee advisors: some advisors (including Seaborn) separate their financial planning and investment management offerings, charging a flat fee for planning and a percentage of AUM for investment management. Generally, the flat-fee portion will match that of "pure" flat-fee advisors, but the AUM portion will be significantly lower than 1%, since it only covers investment management. Because this model is quite uncommon (so far), we don't have a lot of data at this point, but I've seen fees ranging from 0.4%-0.8%.


The 21st century has seen the rise of "robo-advisors", services such as Betterment and Wealthfront that help you establish an asset allocation and then manage your investments in an automated fashion.

Similarly, many financial advisors use what's called a Turnkey Asset Management Program; basically offloading the day-to-day of portfolio management for a fee. (The line between a robo-advisor and a TAMP can be blurry; for example, Betterment offers a service called Betterment for Advisors that is effectively a wrapper around their consumer product.) Most advisors pay the TAMP fees themselves, treating it as business overhead, but it's worth noting that some pass the fee directly on to their clients, treating them more like expense ratios.

What should you expect here? Generally, the cost for a pure robo-advisor is 0.25% of AUM or lower, which doesn't include the expense ratios of the underlying ETF's (see below) but does often include transaction fees (see further below), and some robo-advisors even avoid bid-ask spread (see even further below) by placing trades between their internal clients where possible. Also note that several robo-advisors are also offering a hybrid model, whereby you pay 0.3-0.4% but get access to a CFP® professional as well. Note that this is significantly lower than the prices I mentioned above for "pure AUM" advisors; this is because these hybrid models have a very different structure, more akin to a "call center" than a traditional advisor.

Expense Ratios

If you use ETF's or mutual funds (and I recommend you do, but that's a post for another time), the ETF or fund will charge an "expense ratio" equal to a certain percentage of assets in the fund.

What should you expect here? Very low cost index fund expense ratios range from 0.02% (for large-cap index funds) to 0.14% (for emerging markets). Since low cost is the most predictable indicator of outperformance, this range is a good target.

Having said that: no, low cost isn't the only indicator of outperformance, and yes, it's really the performance net of fees that matters, not the fees themselves. Maybe you find an investment or money manager that you believe has a high chance of outperforming net of fees. Maybe you just don't have access to low-cost funds -- for example, in your 401(k). In these cases, I'm all for expanding your range of acceptable expense ratios. Having said that, as the expense ratio approaches 1%, the chances of outperformance net of fees drop considerably. As of this writing, the highest expense ratio of any fund Seaborn uses is 0.68%, and that's only because the money manager in question has a highly systematic, research-driven, time-tested approach and a long history of outperformance across their funds. (For the record: 0.68% is for DISVX, an international small-cap value fund, and the overall expense ratios for our portfolios that use that fund range from 0.27%-0.37% as of this writing.)

Transaction costs

For investments outside of a 401(k) and 403(b), it's generally going to cost you a commission every time you buy or sell securities. Your custodian (Fidelity, Schwab, Vanguard, TD Ameritrade, etc.) may have a transaction cost of $10-$40 per trade. As an alternative to this "transaction-based pricing" model, trades may be covered by "asset-based pricing", in which case the custodian charges a fee of e.g. 0.07% of assets for unlimited trading. (Generally, ABP is only available through financial advisors, rather than directly to consumers.) Either of these is generally okay, though obviously there's a threshold at which one or the other is better for you in particular; for lower AUM's, ABP is better, and for higher, TBP is better.

Now, hopefully you're not trading very much, so the transaction costs should be minor, but what do you do if you're a fan of putting in a little every month? Custodians generally offer NTF (no transaction fee) funds or ETF's for just such occasions, though the list of NTF's can change over time, depending on the relationship between the custodian and the fund providers in question. Also, some custodians offer automated investing at a reduced price; for example, TD Ameritrade Institutional offers "Mutual Fund Systematics", a system which allows automated periodic additions to existing holdings at no fee.

Also, a discussion on transaction costs wouldn't be complete without discussing the bid-ask spread. It is an amazing fact of the modern world that you can find a buyer or seller for any exchange-traded security within a day -- or, in the case of high-frequency traders, within a fraction of a second! However, this liquidity comes at a (reasonable) cost: every time you make a trade, the "market maker" will buy securities from you for just a little under the current market price, and sell securities to you for just a little over it. Note that this is only an issue for exchange-traded securities (ETF's, individual stocks and bonds, etc.), and thus doesn't come into play for open-end mutual funds, whose price (net asset value, or NAV) is purely set by their underlying assets.

Since bid-ask spread is a fluid product of supply and demand, it's not displayed nicely in a table the way that other fees are. That said, it generally amounts to 0.01%-0.06% for most securities and ETF's, so it's not going to unduly reduce your returns -- assuming that you're not day-trading!

How about you?

Those are the big fees (and even a couple of small fees!), but are there any other costs you've heard of and want to know about? Post them in the comments, or send an e-mail!

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