The four letter word of the investment community. Fees. The cost an investor incurs in addition to the price of the investments they choose. Wynn Capital Management charges a fee for the portfolio management and financial planning services we provide. The mutual funds and ETF's we choose for our clients charge a fee as well. How do you know if the fees we charge are appropriate?
Read through this quick guide to understand fees and learn how we work hard to keep your costs as low as possible.
Advisor Fee +
Advisor fees can be expensive or a bargain depending on the quality of the service rendered. Defining "quality" is always tricky without a frame of reference so I will outline some important questions to ask.
Conflicts of Interest?
Your advisor needs to be a fiduciary. A fiduciary is legally bound to make the best possible choice for you in every scenario regardless of the impact on him/her. Advisors who are not fiduciaries are typically leaving the door open to sell you products that generate commissions for them. Registered Investment Advisors will likely be fiduciaries. Folks who work for large banks, insurance companies or brokerage firms will not.
How do you get paid?
The golden rule is to make sure your advisor only benefits when you do as well. A fee-only advisor charges a flat fee for service. It can be hourly, monthly, yearly or as a set percentage of the assets they manage for you. In each scenario the advisor gets no benefit from excessive trading or recommending unnecessary products i.e has no conflict of interest. Advisors who receive compensation based on the products they sell or the trades they place for you are incentivized by their own interest, not yours.
An advisor should be qualified to provide the service you pay for. The barriers to entry in this field are surprisingly low. Peruse any of the job boards to see what the big firms look for in a candidate: Sales skills required, finance experience not necessary. As an average investor you will be talking with this person as he/she builds a book and then be passed down to a new recruit as they move up the food chain. If you are going to pay a fee make sure you are working directly with an individual or team that has extensive real-world experience in the financial markets and will be with you for the long haul.
An advisor should also have a clean record-enough said. Be sure to look them up on Finra’s Broker Check before doing business with them. http://brokercheck.finra.org/
Your fee should be helping to pay for ongoing education and upgrades to firm technology in addition to compensating your advisor for his/her work. New technology will greatly improve the look and feel of your experience and add efficiency to the organization. Ongoing education for your advisor is a necessity, not a luxury.
If you have winnowed the field of candidates down to only well qualified fiduciary advisors who don’t charge hidden fees you are on the right path. Within this group each advisor will have strengths and weaknesses that may make their fee more or less attractive to each individual investor.
Portfolio Fees =
Some people choose to work with an advisor and some do not but everyone who invests will pay to participate in the markets. I will outline the various costs to be aware of and give some guidance on minimizing these costs.
1. Everyone Pays:
The charge for executing a buy/sell transaction. This cost should be kept as low as possible. Many online providers offer low cost per-trade deals when you open an account. If you use an advisor or broker they had better be competitive with these rates.
An additional consideration is the amount of liquidity available for the investment you choose. If you choose an uncommon investment there might not be a good price available when you need to sell it, just like with a home our automobile.
2. Some People Pay:
The expense ratio is a measure of what it costs an investment company to operate a mutual fund or ETF. They pass this cost along to the investors in the fund or ETF.
Individual stocks do not incur this expense but our ability to craft a properly diversified portfolio using low-cost mutual funds and ETFs makes the expense well worth it. Funds with relatively low expense ratios have been found to outperform funds with high expense ratios.
This is a "big ticket" item that we spend a lot of time thinking about and our typical expense ratio is about 20-25% or industry average.
Another “big ticket” item. The turnover ratio provides the percentage of a mutual fund or ETF’s holding have been replaced with other holdings during a given year. If the turnover ratio is 90 then 90% of the holdings have been replaced or “turned over” throughout the year.
High turnover funds incur higher trading costs due to the additional transactions. If the account is taxable (not a 401k or IRA), high turnover funds will also generate more “short-term” gains which are taxed as ordinary income rather than the advantageous “long term” gains.
Our model portfolios maintain a turnover ration of less than 10%.
The money earned by a broker/salesperson for executing transactions. There are still many brokers who get compensation for executing trades. They can charge a set amount or sell you some of the assets held by their firm at a markup.
As a fee-only advisor we do not receive commissions.
3. You should not pay:
Loads (Mutual Fund Sales Charges):
Some mutual fund companies pay a fee to brokers for recommending their funds. The fee is paid out of the client's money either up front (A shares) or on the back end (B shares). We are highly, highly averse to these fees and do not recommend funds that charge them. There are many funds without these harmful fees that offer similar performance. Many people who come to us are paying these fees without ever realizing they are doing so. Why? The fees are taken in a multitude of ways that do not clearly show up on your statement. We are happy to look at your portfolio and let you know what you are really paying per year.
A trailing fee that is another sales charge. It is charged as part of the expense ratio so it can be detected more easily than loads. We also do not recommend funds that charge 12b-1 fees either.
All In Fee
Unfortunately, new clients are often surprised to learn that they had been paying a host of hidden/confusing advisor or portfolio fees making their "all in" cost much higher than they thought.
Our all-in fee is much lower than industry average and we will be happy to compare apples to apple during a free consultation. Our clients know exactly how much they pay.
We have the cleanest possible business model, purposely avoiding any and all conflicts of interest with our clients. We build and maintain properly allocated, globally diversified portfolios for our clients and our expertise allows us to offer significantly less risk for each unit of return. We each bring real world experience and expertise to the table and we work hard to earn our fee.
A typical WCM portfolio is approximately 80% cheaper than industry average while providing competitive returns and lower risk.
Wynn Capital Management clients pay some of the lowest portfolio fees possible. We charge no hidden fees or commissions. We search out high quality mutual funds and ETFs with extremely low transaction costs, expense ratios and turnover ratios. We are thoughtful about when and why we trade to reduce transaction costs and tax consequences.