Written By: Lisa Strohm
At JoycePayne Partners, we often work with clients whose previous investing experience has been at one or more full-service brokerage firms. When the topic of fees arises, we find that clients were frequently unaware of many of the fees they were paying for advice and services under their brokerage arrangement. Furthermore, once tallied up, these “hidden” fees often exceeded the cost they now pay under our Fee-Only platform.
Fee-Only: At JPP we are a “Fee-Only” shop. That means that for our advice and services we charge a percentage of the assets that we manage. (Clients may also pay nominal trading fees to their account custodian, such as TD Ameritrade or Fidelity). This “simple” fee structure, as well as the fact that we report our clients’ returns net of fees*, means transparency in terms of total fees paid as well as fees’ impact on returns.
Brokerage Fees: Our Fee-Only structure is in stark contrast to the fee structures at many full-service brokerage firms, where fees may come from several sources and may be “hidden.” Here’s a look at just a few of those not-so-transparent fees:
Stock commissions: As mentioned above, custodians like TD Ameritrade, which are often used by Fee-Only firms like JPP, will often charge a very modest fee to cover the administrative cost of executing stock trades. On the other hand, brokerage firms typically charge a sales commission upon both purchase and sale of a stock from 1 to 3% of the trade amount. What’s more, these commissions are not always explicitly broken out on the trade confirmation – rather, sometimes they are blended into the average purchase or sale price of the shares of stock. This makes it difficult for the investor to easily calculate their commission cost.
Bond fees: At JPP we do not collect a “markup” when we purchase individual bonds on behalf of our clients. The fact is, most brokerage firms do charge such a markup, and the SEC does not require broker dealers to disclose the amount of the markup. In fact, firms are legally allowed to charge undisclosed markups ranging upward of 5 percent. Obviously, these markups need to be considered when tallying the cost of doing business at a brokerage firm. Unfortunately, there is often no mechanism by which clients can extract this information from their trade confirmations.
Mutual fund sales fees: At JPP we use only “no load” mutual funds in client accounts. This means that there are no sales-related fees attached to the purchase or sale of a mutual fund. Financial Advisors at brokerage firms, in contrast, get paid for mutual fund sales via “sales loads.” These loads can be front-ended (charged upon purchase of the fund), back-ended (charged upon sale of the fund), and/or annual (known as 12-b-1 fees). These loads typically range from 1 to 5% of the value of the trade.
Additional “hidden” fees charged by brokerage firms include but are not limited to trades on closed end funds, ETFs, annuity investments, insurance purchases, firm’s proprietary funds, and “non-traditional” investments.
In summary, the “hidden” fees inherent in the fee structures of many full-service brokerage firms means that clients are often paying more than they think for advice and services. In contrast, the “Fee-Only” model employed by JPP means that clients can easily determine the cost of services and its impact on investment returns.
Returns are reported net of fees on quarterly performance reports for those clients whose fees are automatically deducted from an investment or bank account each quarter.
Written By: Lisa Strohm