Next to your portfolio’s performance, fees are the most important part of your portfolio. How much you’re paying in fees can be the difference between an outstanding year and a mediocre one.

Fees come in all shapes and sizes. By the end of this guide, you’ll be able to recognize and identify each of the types of fees affecting your portfolio. By better understanding what is going on in your portfolio, you’ll be able to make smarter decisions and have smarter conversations with the people who manage your wealth.

Here are the different types of investment advisor fees and what you should look for when you encounter them.

The most commonly asked question we hear is “what is your fee?” The answer is: it depends.

An investment advisor’s fee is set by the advisor themselves. They are allowed to discount (or negotiate) their fee schedule before an investment advisory agreement (IAA) is signed. Once the IAA is signed, the fee is locked-in and cannot be changed without your signing a new contract.

For one reason or another, an advisor may opt to discount or credit a client’s account by a set dollar amount. An advisor will let the client know when they are doing so, and will deduct the dollar amount from a client’s fee at the end of the period. 

Most investment advisors set their fees on a “sliding scale” or a “wrapped fee schedule.” What this means is that a different fee is charged on different levels of your wealth. 

For example, if an advisor had the following fee schedule:

$0 - $1,000,000     100 bps

$1,000,000 - 2,000,000      50 bps

Then the advisor would charge $10,000 on the first million (100 bps, or 1%) and $5,000 on the second million (50 bps, or 0.5%) for a total of $15,000 per year.

An advisor may have two tiers in their wrapped fee schedule, or they may have 50. The number of tiers is completely up to the advisory, and when there is an opportunity to negotiate, these tiers may change in an investor’s favor (and never in the advisor’s favor, prohibited by their ADV). 

Some advisors charge a flat annual fee for their management services. This fee can be a set dollar amount (ex. $10,000) or a set AUM amount (1.20% or 120 bps). 

Other advisors will offer (alongside long-term IAA’s) a one-time consulting fee for individuals who prefer to manage their portfolio or financial plan themselves, but would like some guidance or direction. These one-time consulting fees will typically be a flat fee (ex. $1,700), and in return, produce a document or other physical financial plan for an investor to refer to. 

Generally, the dollar amount quoted is an annual figure. Advisors will bill their clients either quarterly or monthly, in advance or in arrears.

When an advisor bills a client in advance, the client is pre-paying for the next month or quarter’s investment advisory services. 

Some advisors prefer to bill in arrears, where an advisor bills the client for the services provided for the previous month or quarter.

In both cases, clients can choose to pay using a variety of methods, including checks or payments directly from their accounts. In some cases, paying from an IRA can be a tax-efficient payment strategy. 

One term that has jumped into the spotlight in recent years is the idea of a “fee-only” advisor. A fee-only advisor is an investment advisor that is compensated only by their clients. 

Some investment advisors are compensated by both their clients and outside sources. When an advisor is compensated by a third party, there may be a conflict of interest that could negatively affect an investor’s experience. Commissions and other outside incentives could lead to an advisor recommending investments that are not in the best interest of the client. 

A fee-only advisor is also considered a fiduciary, which is an advisor that carries a fiduciary responsibility to only and always act in a client’s best interest. 

Along with an investment advisory fee, there may also be other fees that affect a portfolio’s performance. Expense ratios, fund management fees, trading fees, and other custodial fees can add up to become a significant drag on a portfolio. 

An expense ratio is a percentage charged on an investment in a mutual fund or exchange traded fund (ETF). Expense ratios go to the management team of a fund to pay for analysts and other fund managers that keep the fund (hopefully) performing well. 

One way to think of an expense ratio is a hurdle that your investment must “jump” over in order to have a positive return. For example, if you wanted a 2% return from a fund, and the fund’s expense ratio is 1.64% (an extremely high expense ratio), you would need the fund to achieve a 3.64% return in order to receive your expected return on investment. 

Some mutual fund and ETF companies have a competitive advantage in their low expense ratios. Vanguard is one company who has extremely low-cost mutual funds and ETFs. 

You can check a fund’s expense ratios using any of the usual stock tools - Yahoo! Finance, Morningstar, and MarketWatch are a few popular websites that offer analytics on ETFs.

Trading costs are small costs charged on each trade a person makes. Trading costs can be different between stocks and funds, and it can even be different for different funds. 

Some trades have no trading fees associated with them. At Charles Schwab, there is a select group of mutual funds and ETFs available to retail investors that have zero trading costs. For young investors or smaller investors, avoiding trading costs can be a nice way to reduce fees in their portfolios. For investors trading larger positions, trading costs can be considered marginal. 

Some advisors have deals with their custodians to provide asset-based pricing, where the investor does not pay per trade, but rather as a small percentage of assets (similar to an assets under management fee). 

As of October 7, 2019, both Charles Schwab and TD Ameritrade have reduced trading costs of equities to zero for investors who have their money custodied at these institutions. No one is sure what this will mean for the industry over the long term, but these reductions are very helpful in cutting costs for investors. 

When tax season comes around, most individuals feel comfortable enough to do their taxes on their own using a service like TurboTax or H&R Block, which guide investors through the process of completing their taxes. 

For investors with more complicated financial situations, using a CPA’s services may be more effective than doing them alone. While CPA’s charge a fee for their services, their work on correctly and effectively reporting taxes may save an investor a significant amount of money (not to mention headaches). 

Some financial advisors (Chicago Partners included) also offer tax planning as part of their overall services. Generally, the cost will be included in the AUM fee, and are completed by a CPA who works closely with the company and their other clients. 

While the world of investment and financial advice is saturated with fees, knowing what they are, where they are, and how they affect your portfolio’s bottom line can help you, as an investor, optimize the way you manage your wealth.