How do you invest? What do you really pay? At the end of the day,
what are your real results? These are questions smart investors
should be asking themselves (but usually don't). In this era of
more fees, misc. charges, holding periods and back end
redemptions, even at discount brokers, how are you really making
out?
Working with a new client brought this all to my attention. I
know what I found may not apply to everyone; however it will
apply to many and very likely apply to you.
I need to preface this by saying that, unlike the majority of
registered investment advisors, I have built my practice over the
past 15 years by dealing with "small" investors. Many of them are
first timers because my minimum account size is only $5,000.
I targeted this group because I enjoy the educational part of my
business. A happy side benefit has been that by providing million
dollar service to these so called "small" investors, they
naturally refer me to parents, relatives, friends and business
associates, often with considerably more assets than the original
client. What a happy consequence.
Having set the stage, here's what happened with my new client who
we will call John. John was 26, newly married with a one year old
son. His wife was taking care of the child and John had a good
full time job. After selling his house in California and moving
to Florida he had $6,000 left for starting a long-term investment
program.
Though he had been reading my newsletter for about a year, John
decided to manage his 401k on his own. It was a noble effort but
provided less than desirable results.
He then attempted to set up a brokerage account at a major
discount broker. With his $6,000 he was told that the quarterly
fee would be $45, and, of course, if he sold any mutual fund
within the first 180 days, there would be an early redemption
fee.
$45 per quarter would be equal to an annual fee of 3% of his
starting balance. John called me somewhat frustrated and said
that he'd be willing to set up an account with me, but how would
it make sense if in addition he'd have to pay my advisory
management fee?
That was a good question because it certainly doesn't make sense
to have an account in any type of market environment and pay
about 6% in fixed annual fees.
However, what John didn't know was that if you have an account
with a registered investment advisor who is affiliated with
custodial broker, the fee structure changes.
What did that mean to him? It meant that I opened the account for
him as a new client. He now has no annual fees, other than my
management fee, and his 180 day holding period for mutual funds
is reduced to 90 days, minimizing, if not eliminating, the
likelihood of an early redemption fee.
The net result was that he would receive the benefit of my
experienceâ€"which he already trusted based on my track record of
pulling clients out of the market in October 2000â€"and it would
cost him no more, and likely less, than his discount brokerage
account.
Needless to say, John was very relieved. In essence, he traded
broker garbage fees for professional management at no additional
cost to him.
And, since he itemizes his deductions on his tax return, all fees
paid are tax deductible, which is just an added bonus to factor
into the equation.
It turned out to be an all around win-win situation for John. I
encourage you to review your situation and see if what looks like
a discount in fees is actually costing you a premium.
© Ulli G. Niemann
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