Recently a friend who knows of my interest in investing and personal finance asked me to look over her investments.  She currently has an account with an advisor at a major firm (which shall remain nameless).  My friend is a fairly conservative investor and the account is a modest size as most of her investable assets are currently in her 401K.  Her advisor receives a fee of 1% of her assets under management.

At first glance, the investments that her advisor had put her into seemed perfectly appropriate.  However, upon closer inspection I realized that her fund fees were an astounding 1.6%!  Between what she was giving her advisor and what she was paying the fund company, she was giving up 2.6% of her return.  I heard a quote somewhere (if it is yours please forgive me – or if you know whose it is, feel free to drop me a comment), “Performance comes and goes, but costs go on forever.”  For every $10,000 she has in her account, she is giving up $260 in fees.  Given that she has fairly conservative investment mix, I suspect that the fees will seriously harm performance over the long term.  Comparable index funds that matched her investment style could be found with expense ratios around 0.12%.

I am not trying to disparage Financial Advisors (I may become one someday), but here at Bootstrap, I believe that you need to take responsibility for your investment decisions.  Employing an advisor is absolutely the right thing to do for many people, but please make sure you know what you are paying for.  Here are a few tips:

Ask for all fees to be disclosed:  Your advisor should have no problem listing out all the fees he/she receives.  All commissions, fund commission, sales charges that find their way to the advisor should be disclosed.  If you don’t understand, ask for a written summary.  Keep it.

Ask for the reasoning behind the investment products:  An advisor should be able to articulate the strategy they pursue on your behalf.  You should feel comfortable that it matches your tolerance for risk.

Ask for the underlying costs of any mutual fund recommendations:  There are a variety of mutual fund fees, some of which can circumspectly come back into the advisor’s pocket.  Make sure you understand the fees of your funds.

Ask if there are less expensive alternatives:  Many funds have index equivalents with much lower expense ratios.  Ask for a comparison – if there is a lower expense ratio ask why the advisor didn’t recommend it.
If you are not satisfied with any of the answers – take your money elsewhere.  There are honest and ethical advisors out there.