Fee-Based Investment

  

Categories: Managed Funds

There are two basic categories describing how investment managers earn their money. Unfortunately, the terms sound very similar, as if they were designed to cause confusion. The categories: fee-based and fee-only.

Fee-only managers get paid directly by you. Their compensation comes (like the name says) only from the fees they charge their clients. Fee-based investors can charge fees also, but they can earn commissions on top of that.

Fee-only managers might be more expensive to you, since the only way they earn a living is by charging you money. However, their advice comes without any conflict of interest. They don't earn a commission from selling you any particular fund, so if they suggest a fund, you can assume they really think it's the best option for you.

Fee-based managers are subsidized somewhat by the commissions they earn by pushing certain products on their clients. That might make them cheaper, at least in terms of your out-of-pocket expenses. But because they earn a commission, you have to look out for a potential conflict of interest. Their advice might come with additional baggage that you'll have to weigh when deciding whether to buy into a fund they are pushing.

Related or Semi-related Video

Finance: What is Compensation: Advisory ...2 Views

00:00

Finance a la shmoop what are advisory fee limits? well they're basically a

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price ceiling above which financial advisors can't go yeah I can't go they [Financial advisors in an elevator and hit price ceiling]

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can't touch that ceiling you know like hammer time, can't touch this...

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so when you invest in a mutual fund you pay two fees there's a commission

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and there's an annual management fee usually based on the assets you have

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with them under management like maybe it's one percent on the first hundred [Asset rises]

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grand that you have and then half a percent above a million or whatever

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but there is a third and insidious fee element in the world called advisory

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fees like how do you choose which fund to buy well if you have a financial

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advisor they'll walk you through the lists of mutual funds out there and [Ice cream flavors appear]

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index funds and all other set of funds as well well they're like a gazillion of

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them and then that advisor will charge you for their time in some form right

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someone's got to pay for their beach house well if you start adding up all

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the fees you're paying for arguably no better performance than had you just [Itemized list of fees appear]

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logged onto schwab.com or fidelity.com and bought an index fund hmm

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well then you're gonna start to pause here it starts to be a big number in

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those fees that eat meaningfully into your investment returns most buyers of [Pacman fees eating up money]

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mutual funds are not financial gurus yeah not like that they're doctors and

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lawyers and plumbing parts distributors and they really don't have a

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sophisticated understanding of just how badly they could get taken by

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unscrupulous financial advisors so the industry placed a series of structured

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limits to keep the non gurus safe from the financial predators when it comes to

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compensation and fee limits you know on advisory services and predators like [Tiger walking by]

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this guy

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