How much does investment management cost? (+ examples)

You are scanning an investment firm’s website and looking at a few articles because you want to grow your money, increase your wealth, and reach your financial goals. And you started wondering – “How much does all of this cost?”

You know there are fees for doing business; there is no free lunch in the investment world. But how much should you pay for investment management? When do expenses start reducing your returns? Where is the line between “you get what you pay for” and “you overpaid?”

We will answer these questions and more in this article. 

But first, I must admit two things. One, the financial industry as a whole is notorious for hiding fees by renaming them, tucking them deep into the paperwork, or simply not telling you about them. And then, the industry is full of liars, salesmen, and blowhards that don’t like to tell the truth about fees. Second, I don’t like to write about costs because I typically become a terrible smart-aleck and can explain them in person in a minute or two.

However, (deep breath…) YOU deserve a great answer regarding how much investments might cost you.

And in defense of the industry, there are plenty of wonderful and ethical people to serve you. But more than a few bad apples have tried to spoil the whole investment bunch.

Now that has been said - our goal is simple. Whether you work with us or not, we want to make investment expenses easy to understand and help you spend your money wisely so that you reach your financial goals.

Often in my career, I’ve been asked, “How much do you (Chris) get paid?” That’s a great question, but what you really want to know is, “How much will investment success cost YOU?” You may want to know how much I get paid (& I’ll tell you if you ask), but you need to know much you will spend on investment fees and expenses.

So, here is Sound Financial’s answer:

Our total annual client costs can range from .60% to 1.64% of the total account balance in the portfolio. For example, investing $100,000 – 1.64% is $1,640 annually. These fees can include account, trading, and technology fee .05%; asset management fees .15%; and advisory fees up to 1.44%.  

(Boring but true disclaimer: Please keep this in mind, I am answering this question as accurately as possible. But I do not know you or the details of your account. So, consider all of these answers as approximations. Your costs would be calculated based on your account values and investment choices.) 

Now that I’ve answered that question directly – how much you will spend at Sound or anywhere else in the financial services industry depends on a few factors. The financial industry is notorious for hiding fees; we want to make those as transparent as possible. So, what do your costs depend on?

Cost factor #1. Your investments.

If you invest in an all-fee-based portfolio, like one of our managed investment models, your costs are calculated as a percentage of your total assets invested. In practical terms – you pay a rate based on your portfolio. These are common cost characteristics of a managed (Advisory) account.:

• If you invest in an all-stock portfolio, the account fees should be ninety-five plus percent of your total costs. Stocks do not have additional expenses like an expense ratio or 12-B-1 fees. 
• Fees are paid quarterly based on an annual calculation. In other words, if you were to pay $1,640 per year, you would pay $410 every three months.
• Fees are taken from the account. So, you will not need to write a check or set up a bank draft. Although in some cases, you have the option to set up different payment methods.
  Advisory fees are transparent. These should be reported on your quarterly account statement's front page (or near it). 
• No early withdrawal penalties. You are not penalized if you move your money out of the account or take a distribution.
• If you have an ETF (exchange-traded fund) or mutual fund investments – which is how many investors build portfolios – then you could have an additional expense.:
  • Expense ratios are the internal expenses of an investment fund. These are some of the hidden fees that I mentioned earlier.
  • In 2022, the national average mutual fund expense ratio is .405%. With this expense ratio, your cost would be $4.05 per $100 invested in a mutual fund. Keep in mind that the more active a mutual fund or ETF is managed, the more expensive it gets.  
  • Low-cost ETFs are always an option. But remember, these mimic an index, so be sure that index will help you reach your goals.

Cost factor #2. Your financial goals. 

Remember, your investments should support your financial goals  – not the other way around. Money is just one of life’s tools, nothing more. So, your goals come first; you are paying for a result. 

Therefore, you may need financial planning to reach your goals. Financial planning costs are discussed later in this article. 

Your financial plans may call for investments with a cost structure other than fees. Those investments may be commission products.

There is much talk in the financial services industry about using a “fee-only advisor.” At Sound Financial, we are a fee-based financial advisory firm. But we are not “fee-only” because many commission products can be valuable and help investors reach their goals. 

For example, there are times to use annuities. 
You may want to guarantee a portion of your income or protect yourself against market losses. You can pair annuities in an investment portfolio based on your goals and risk tolerance. 

And currently, based on our research, the commissioned annuity products offer the best options for investors when compared to fee-only annuities. :

• Typical annuity commissions are approximately 4-7% one-time upfront or 1% annually. These should not reduce your total investment.
  Therefore, your costs are based on the features of the annuity itself. Your fees may range from 0-3% or more per year. However, remember there is NO FREE LUNCH. Most annuities have surrender periods and penalties. So, have an understanding of how the investment works before committing your money to it. 

• Typical mutual fund commissions:
  • A-share commissions are approximately 4-8% upfront (a Load Fund). These reduce your initial investment. Yet, the annual expense ratio (your cost) is typically lower, approximately .25%.

• • B-share commissions are also approximately 4-8% on the “back end.” You would not pay an upfront commission, but if you sell the investment within a specific time-period, you owe a penalty.
    Again, your cost is an annual expense that is approximately .25%. 

• • C-share commissions are typically 1% per year. Your initial investment is not reduced; you only owe a one-year early withdrawal penalty. 

• Beware commissions can create a conflict of interest for financial advisors, stock brokers, and insurance agents. Therefore, you should ask all of your questions until you are comfortable. A conflict of interest does not mean the investment professional is acting unethically. It just means they should be transparent about the conflict. 

How much should you pay for investment management services? What is normal, and how do these “stack up?”

First, be mindful that you are not “penny-wise and pound-foolish.” You want to work with an advisor at a reasonable and fair price. But if you always look for the lowest cost option, you may get what you pay for. 

Types of services in the financial services industry: 

• Investment management is the building and management of your public investments, such as stocks, bonds, commodities, and funds in a portfolio. 
• Asset management is the practice of increasing total wealth over time by acquiring, maintaining, and trading investments (public and private) that have the potential to grow in value. 
• Wealth management combines investment and asset management with other financial services, such as estate, accounting, retirement, or tax advice, into holistic and typically complex financial strategies.
• Financial planning is creating and documenting your current financial circumstances, short and long-term goals, and strategies to reach these goals, including investment, insurance, tax, and estate planning. It should be practical and only as complex as necessary.

What is the average cost of these financial services?

• <$250,000 = 1.85%
• $250,000 - $500,000 = 1.75%
• $500,000 - $1,000,000 = 1.65%
• $1,000,000 - $2,000,000 = 1.50%
• $2,000,000 - $3,000,000 = 1.40%
• $3,000,000 – $5,000,000 = 1.30%

However, remember that as financial complexities grow, so do billing methods. 

If financial planning is charged separately, these are typically a flat rate based on the scope of work, ranging from $1,000 to $4,800 for a stand-alone financial planning engagement. Or a financial planner may charge $150 to $350 per hour of work.

How should you pay for investment management?

• Advisory fees are typically taken out of your investment account quarterly. 
• Commissions are paid up-front, as an annual trail, or a combination. Mutual fund A-share commissions reduce the value of your original investment, while B-share and C-share commissions do not. Annuity commissions vary, so you should ask your financial advisor how the commissions are paid and if these affect you. 
• Flat rate is a method of paying the advisor directly based on a one-time or hourly rate.
  
  

What are the advantages and disadvantages of an advisor earning fees, commissions, and flat rate?

• Advisory fees are advantageous because you and your advisor’s financial interests are aligned. The advisor makes more money when you make more, and they lose when you lose. They legally, ethically, and (should be) logically have your best interest in mind. 

One disadvantage of fee-only advice is that the advisor’s investment choices may be limited. 

• Commission products are advantageous in several ways – these can be less expensive over time and open you up to a broad range of investment choices when combined with fee advice. 

A significant disadvantage is that the financial advisor, stock broker, or insurance agent is not required to have your best interest in mind. 

They must only reach a suitability standard, meaning the investment must suit your goals or risk tolerance. It is a vague and murky rule that brokers and agents have historically violated. 

• Flat rate work is excellent for a specific scope of work. You want one job done, the financial advisor completes that job, you pay him, and you go your separate ways. 

The disadvantage is that you’ve commoditized the advisor – they are an hourly worker doing a job. You typically want more from your paid expert.  

What should you get for your fees and commissions?

• First, you should get a plan and support to reach your financial goals. YOU are the customer and are paying for a result – reaching your financial goals. 

Therefore, get clear on your financial goals so that you and your advisor can set excellent standards.

• Second, what services should you get? It would be best if you had an annual review or more, depending on the complexity of your plans. Your calls, emails, and other digital communications should be returned, regardless of market conditions. 

Yours should be a human-to-human experience. 

• Last, if you are paying an ongoing investment advisory fee, you should get a professionally built rules-based investment model that fits your goals. 

In order for your advisor to know your goals, they should at least complete a financial plan with you. And since the fee is ongoing, you should expect ongoing financial planning and investment management. 

It is reasonable to expect that your level of service may vary based on account size and complexity. 

So, what do you get for Sound’s investment management fees? You should get what you pay for!

• First, you will have a comprehensive planning meeting where we will ask – “what do YOU want to accomplish? What are your goals?” 

Because we want you to be financially successful, we will develop a financial plan for you to reach these goals from this conversation. 

• Second, we will discuss how much investment risk you are willing to take to reach your objectives. 
• Third, we will walk through our rules-based investment process, where we take action to make your goals and desires a reality. Sound Financial’s investment strategy is described in this article.
• You will have traditional and biblically responsible investment choices. And our fees are radically transparent. 

Your investment choices are your decisions, and we will walk you through the planning process. We will craft an investment plan to make your goals possible. Then we will continue actively managing your investments based on the plans we’ve built together. 

For more information, please see our site for other articles or set an appointment with us. We look forward to talking to you soon!