Andrea Fuller, an investigative reporter for the Wall Street Journal, thought she was asking a very simple question: how much was she paying her investment advisor? The answer, as you might guess, was anything but simple. Her article in Sunday’s Journal goes on to describe the ‘confusion and frustration’ with her inquiry, and after talking with multiple people, she still had no convincing answer to her simple question.
Let’s state something upfront: if you’re a client of an investment firm, you deserve a straightforward, simple answer to how much you’re paying in fees, and you should be able to see it in writing. It shouldn’t take multiple phone calls, it shouldn’t take weeks, and it most definitely should not be a broad range.
Unfortunately for most people, this question is really four questions in one:
- What am I paying my advisor in fees?
- What am I paying the company?
- What am I paying for the products?
- What am I paying in commissions?
If you’re a client of a big, lumbering bank, chances are you need to ask all of these. Let’s take them one-by-one:
- If you ask this and your advisor can’t answer you in two sentences, or worse, has to ‘call you back,’ you should fire them immediately and change your number. This isn’t debatable; if they can’t answer quickly and succinctly, they don’t deserve your business.
- Most of the big banks charge some type of account fee, but the rules are always different. Some are based on type of account, some on type of holdings, and some on how much money you have. Ask for these specifically, then ask about trading commissions, custody fees, etc., along with any other fees you’re paying for the ‘privilege’ to have an account there.
- Financial products will always have fees, commonly wrapped up in what’s known as an ‘expense ratio,’ given as a percentage. If you own mutual funds, ETFs, or any other colorful combination that Wall Street has invented, there are internal fees in them that you don’t see. It’s not an answer advisors can typically quote immediately, simply because you are likely to have multiple positions and each one is different. However, it is definitely something your advisor should be able to research quickly and provide. A good advisor will have a very clear understanding of the products in your portfolio and will have already considered their fees – if your advisor is embarrassed to reveal this number or tells you to look it up yourself…fire them and change your number.
- Here’s where things really get dicey…your advisor could have accurately answered all of the above, but you’re still not close to the truth. If your advisor is not a fee-only fiduciary (why!??), then you can bet that he/she is receiving some sort of commissions behind the scenes. Product markups, mutual fund ‘trails,’ sales charges, etc, etc. They go by many names, but let’s call a spade a spade – this is an extra revenue line for the company and your advisor, and they’re really hoping you don’t go asking about it. Ask them to detail this for you and put it in writing – you’ll see more dancing than a 1am wedding reception.
On the other hand, if you ask your advisor these questions and the answer seems remarkably simple and reasonable, you can rest assured you’ve hired someone on your side.
The big talk this week among finance wonks is the ‘VIX,’ also nicknamed the ‘fear index,’ which hit its lowest level since 1993 (also when it was first used). The VIX is precisely known as the Chicago Board Options Exchange Volatility Index (got that?). The CBOE says it is a “key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.” In lay terms, it’s a number that goes up when the market trades in wide ranges, and dips very low in times when the market is tame, like the last 6 months.
The sheer volume of articles and reporting this week is a classic case of the financial media focusing on something that is really irrelevant to you, a long-term investor. The media would have you believe the VIX is a prognostication tool, as if a decades-low VIX were a predictor of imminent doom. It’s not, but you wouldn’t know it from the headlines:
What most of the headlines fail to point out is the VIX moves real-time, just like the market. On days when the market drops a bunch, the VIX will spike up, this is how it earned the name ‘fear index.’ But when people are dumping stocks, you can see it because, well…the market goes down. You don’t need the VIX to tell you the market went down, the market does that itself. Here’s what you need to know: the market is calm right now. At some point, it won’t be, and at some point the stock market will go down. You don’t need a fancy calculated index to tell you that.
As Barry Ritholtz expertly points out here, this is another case of the media hyperventilating over something that sounds sophisticated, but really doesn’t warrant your attention.