Question(s) About Mutual Funds Bought Through Advisors
 

I have never bought a mutual fund through an advisor. (I buy them but without an advisor in the middle.)

I know that financial advisors often get paid a 1% annual fee of assets under management, which may vary to a lesser percentage on AUM over a certain amount. This part of advisory fees is clear to me…..

But here’s my question: On top of that fee for AUM, do financial advisors also get paid by the mutual funds they sell? Loads seem obvious to me, but what about those other costs and fees that show up inside mutual funds? Does the advisor get a piece of that action, too?

(I tried to learn about this on the FINRA site which has a section that is supposed to help, but I did not get very far.)

If the advisor is being paid by the funds in addition to being paid by the client, should the advisor report that amount to the client to give a clearer picture of the client’s cost of doing business?

I hope someone knowledgeable here will take pity on me and give me the Cliffs Notes answer to my confusion on this. (So far, no advisor for me, but I am thinking, “What if?”)

In other words, in the world of financial advisors, is there icing on that cake that is the fee quoted for AUM? And, if so, where is it in the mutual funds and/or ETFs?

Boomer

I don't think you will ever get a definitive answer to your questions. But, I think the advisor should get most or all of the sales load, because they made the sale. They should not get any of the internal fund management costs because they are not involved in the ongoing management of the assets within the fund. Should the advisor disclose this information to the client? No. The load is disclosed in the fund prospectus, and it should be obvious that it is a sales commission for whoever sells the fund. The advisor should make a general disclosure to the client that they do recommend some commission based products. I only buy no load funds and do not pay any AUM fees.

I don’t pay loads or AUM fees either, retiredguy123. Also have a few individual dividend stocks that I tend to marry.

Thanks for your answer.

My next question is how could there possibly be an advantage to the investor in a load fund? I was looking at one that shows a 4.5% load. Well…….that’s sure a load.

With so many no-load funds available, is there ever a good reason for an investor to pay a load or do they just get slid into a portfolio because sometimes people don’t read the prospectus? What am I missing on this one?

Boomer

The only reason to ever consider a load fund is if the results are so great that results are still awesome after subtracting for the load. To me not about to pay a sales charge or load.

Years ago there were lots of load fund but they seem to be going away.

If you buy a managed mutual fund, as opposed to a passive index fund, you are paying a percentage management fee to the mutual fund company. On top of that you are paying your advisor fees to manage your money. This does not make sense to me. We buy mutual funds ourselves and pay only the mutual fund fees.

Boomer, you probably already found and read this.

"Brokers are paid commissions based on the products they sell and are oftentimes incentivized to sell certain products over others. When you purchase a mutual fund with a sales load, part of that additional expense is used by the mutual fund company to pay a commission to the advisor. Additionally, most mutual funds charge a 12b-1 fee as part of their expense ratio collected each year. Part of that fee goes toward paying the broker a trailer commission, so long as the client remains invested in the fund.

In contrast, if your financial advisor is a fee-only, fiduciary advisor, then they do not receive commissions or compensation from outside parties."

Are Financial Advisors Paid by Mutual Funds?.

I still manage my investment portfolio and frankly enjoy it, but dread the day I have to pay an advisor to do so. Probably I will use a fee based one who will direct my trustee. This is the outfit specified in my RLT at this point in time. I am not recommending them. They can manage my commercial property in New Mexico, at least until after my death at which point it can be sold without paying enormous LTCG taxes on it. Much more sophisticated outfits are available in coastal metropolitan areas but this one suits my needs.

https://ziatrust.com

Thank you to all for answering my questions. Here’s the backstory: A friend showed me a list of the top holdings in her account managed by an advisor. (Not amounts, only fund names — I never discuss amounts.).

Anyway, I could see the type of funds they were — which had been chosen according to her risk tolerance. But I was trying to dissect each one to see the fees associated, but most were not easy to find out much about. I guess because they are probably institutional funds used by the really big money management houses and are possibly proprietary — or whatever it’s called when the fund can be bought only through an advisor.

I found one with a big front load and two with expenses of 1.18% which seemed way too high to me. I tried to use the FINRA evaluator but it did not give a lot of info. I did not get through the whole list.

I am not concerned that she is in the hands of a Bernie Madoff. That’s not it. It’s a big, legit, old advisory firm with a very high profile, and stockholders — which we all know come before the client. If she wants to do business with them, that is not my business, but …….it is just that I have an aversion to the wheels within wheels that can exist when you turn your money over to some advisors.

She does not ask questions. She just wants somebody to handle investments for her and that’s OK, but I wish she would ask more questions, other than what’s the return?

The fee paid for AUM I guess comes out quarterly. Not only do they make money when you do, they make money whether you do or not. They aren’t taking that fee out of only your return. It comes out of your total assets. I always suspect that some advisors get you in the door and then put you on auto-pilot and start collecting.

Of course, I know advisors are not doing charity work. They should get paid. But is the difference in fee-only and fee-based that with fee-based, an advisor can have it both ways — the fee from you and the back door stuff from funds they put you in? I know about the prospectus, but they are not the most inviting thing to wade through, so I bet most people don’t……

I think advisors should directly report what their TOTAL return is on having you as a client. As far as that fiduciary thing goes, it seems like it comes with a lot of subjectivity because funds can easily be chosen by an advisor according to your risk tolerance……..

But does being a fiduciary mean that the advisor does not have to consider the associated costs of the fund? (A low risk fund with a bigger fee is still a low risk fund. Right? So it looks to me like there you have it — fiduciary responsibility — subjectively.)

Oh, well………

Meanwhile, I will continue to manage the Boomer Fund. Maybe I would have done a lot better with an advisor. But I am wired to want to do it myself, mistakes and all. I understand everything I buy, but that does not mean I have never lost money. Been at it for over 30 years, but I keep things very simple and clear and that is what I would want from an advisor — if ever.

Like what manaboutown said, I can’t help but think about what if I need to turn it all over to an advisor. There comes a point in life where we do start thinking about the “What Ifs?”………

Boomer

PS: manaboutown shared a link to Investopedia. For those of you who have questions about investing topics or need to look up vocabulary used in the business, I highly recommend Investopedia. It is my go-to. Thanks.

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Boomer, good to hear you were "asking for a friend". It did not seem to be a predicament I would expect you to find yourself in.

Over the course of my senior years some friends and relatives have mentioned to me they use "financial advisors" and I tend to cringe when I hear them tell me so. I have learned to ask no questions about whether their advisors were fee-only, fee-based or AUM since early on I received blank looks from them in response to such inquiries. Then they would start telling me how nice the advisors were and how well they had done for them, nothing quantitative of course. The husband of one widow I know had an advisor who essentially lost it all for them. I have no details but the husband eventually put a reverse mortgage on their home without his wife's knowledge before he passed on in order to buy a new Jaguar to keep up with their social set (he was a yacht salesman).

IMHO the financial world is a jungle, particularly dangerous for the uniformed. The sad thing is few people want to spend the time and make the effort to become sufficiently knowledgable about it to protect themselves from being fleeced, or even shorn a bit

Personally, I don't think an advisor should be required to report their income to a client. Other people who sell products and services don't disclose their income. The mutual fund prospectus discloses a lot of infomation about the cost of the fund, but most people don't read it. But, even if they did, what difference does it make how much of the cost goes to the advisor? The client still has to pay it.

Hey, manaboutown, thank you for the compliment. It is definitely not me…..

Wanna hear something really cringeworthy? I looked in on a Bogleheads discussion about her advisory company. It is a big one and you cannot do your own thing with them like with Fidelity or Vanguard or Schwab. The Bogleheads were having a field day ripping them up and down.

I know exactly what you mean about how so many people think they cannot possibly be bothered or think they cannot understand what they need to know about their own money……

But a lot of that is because there is so much smoke and mirrors in presentations given by bad advisors who do not want to make it easy to understand. Bad advisors will either bore the livin’ snot outa clients or razzle-dazzle them with pretty pie charts and graphs or mystify them with financial lingo, all the while just hoping nobody will have the confidence to ask questions in the presence of such brilliance. Sends me straight to the vomitorium whenever I hear such things. I don’t mean they are all bad, but there is a lot of lazy sleaze out there, just trying to get you in the door and then hand you a boilerplate plan. And some of them will even buy you dinner first.

Like I said, my style is very simple with a few low cost mutual funds and a few div stocks and always with cash on the side. And the cash is finally returning something. It’s not complicated and it does not need to be. I do not want or need to know all that fancy stuff. I just have to understand what I am buying or selling and why. If mistakes are made, I would rather own those mistakes than have to blame them on somebody else.

I have a contact person at Fidelity and although I like her, I will not let go of managing our Boomer Fund. But she’s there if I need her and our heirs know who she is and could need her help — or maybe someday even I will let her help us. I just can’t quite do that yet.

There is also a small firm I like in my hometown. They are independent, but everything goes through Schwab and you can see everything yourself, whenever you log on. I like them for a couple of reasons, one of which is that they have a CPA in with them. I might talk with them further……eventually.

Meanwhile, I’m still at it.

Now, I must leave this post so I can go have a little argument with my other TOTV investment forum old cyberspace friend, retiredguy123. He always has good advice, but I see I need to say my piece about his recent post.

Boomer


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I know people don’t read the prospectus, but what I was talking about is that a good advisor should know that and want to educate his clients and not just say I told you so in the prospectus.

By that I mean a good advisor should not imply that their only fee is the agreed upon percentage, usually 1% of AUM, if it is not just that. I think that if they are collecting other fees and/or loads, they should point that out in the prospectus, maybe take a highlighter to it. :) Let the clients do their own math, but let them know where the extra math is if they want to do it.

Like you said, the client is paying, but I bet a lot of them think they are paying just that 1%. I am still recovering from seeing that 4.5% front load on one of my friend’s funds. And that was a serious chunk of change. The only need for a load in this world of so many choices of funds is for a commission. She thinks she is paying just that 1% of AUM.

But I will not give you too hard a time for your opinion. That is because I am a retired high school teacher and we old teachers can’t help thinking everybody should have the opportunity to understand things by getting all the information they need — whether they want to — or not, by golly! ;) ….‘tis an affliction, I know, and I cannot seem to get past it and I want all those financial advisors to educate their clients by being totally transparent about where alllll the fees could be. Informed decisions needed. I do not expect them to work for free, but all cards on the table seems fair.

Boomer

Understanding compounding your money
 

First Im not a financial advisor but have worked in the industry for a long time. Read a book titled The Simple Path to Wealth by JL Collins. It’s an easy read and puts the concept of why load funds and high expense fees will hurt your long term returns on investments. Keeping it simple by investing in Index Funds( my favorite is the Sand P 500) can offer you great diversification and the chance to keep your money invested instead of paying out some extra fees. Many large national brokerage firms can offer you these index funds with very low expenses tied to them. I also like the idea that the low turnover rate of buying and selling stocks in an index can be efficient for tax purposes. An advisor can help you decide how much should be stock index funds and how much in fixed income allocations but to me that doesn’t justify the high fees I see in many cases. Enjoy that savings on you or your family. It’s really worth your time to have some understanding of where your money is being invested and knowing that historically low fees generally will equate to better returns. It’s a reason so many load funds and high fees have been going away. Thanks a lot to John Bogle the founder of Vanguard.

OP:

‘Financial advisor’ is an ambiguous (generic) term so you are getting a variety of comments that may not answer you question. You said that you read the FINRA website. You may have read this FINRA page about advisors:

Investment Advisers | FINRA.org

If you are wanting to find an advisor with no undisclosed agenda to upsell you investments, you might consider a ‘fee-only’ financial planner (e.g., fee-only Certified Financial Planner) who charges customers for their time or a financial planner at a larger organization such as Fidelity (office in Lake Sumter Landing or remote) and Vanguard (remote). If you have enough investments for someone to manage, you might consider a regulated Trust Company. A local one is Sable Trust (office in Lake Sumter Landing and based in the Tampa Bay Area I believe). If you go with the local lot who offer free lunch seminars, caveat emptor (can you say ‘annuities’?).

By the way, the proportion of mutual funds with ‘loads’ is very small compared to 30+ years ago because of competition (lead mainly by Jack Bogle of Vanguard) and the launch of ETFs. Also, there is no evidence that mutual funds with ‘loads’ outperform funds without loads over the long run. There is not a good reason to pay fund loads now.

Thankfully, people have caught on to the problem of fees and commissions and the types of mutual funds about which you asked are falling by the wayside. It makes little sense to pay an advisor an annual fee of 1% to have him sell you an "actively managed fund which pays the advisor a commission and then charges you an annual fee of, perhaps, 1% of the value of your account or 2+% of the annual gain in the account.

Aside from the fees and commissions, a problem with these funds is that your advisor will be reluctant to move your money from the fund to another which is performing better. At the minimum, an advisor who moves his client from fund to fund is not going to be treated well by the first fund which paid him a commission.

Fortunately, the industry developed "index" funds which you can buy and sell like a stock for no commission. The index might be the general market--the Dow or the S&P 500, or it might be a particular industry, country, or region. If you worked in a particular industry, you might consider an index focused on that industry(oil? transportation? airlines?).

You'll probably be best off putting your money in the S&P 500 or Nasdaq with some in Warren Buffett's Berkshire-Hathaway.

The smart play is to move your accounts to Charles Schwab. It's advisors are as good as any other brokerage's, they are paid a salary and take no commissions, and you can trade at no cost--that's a big contrast to when I started investing in the 60's when commissions took a big chunk out of any gains or made a loss even worse. In addition, you get free checking (including the checks) and a debit card which refunds your ATM fees world-wide.
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Most if not all of managed funds do worse than an equivalent index fund. Why fund managers charge loads is because most people investing in the stock market are naive, which is a shame because they need this money to live on in retirement. I have helped over a dozen friends get out of their ‘managed’ environment to something much simpler, much cheaper, with much better earnings. Some of them had to pay over 5% sales load fee when they exited which they never knew they had to pay.
As for fees, if your money is under a broker like fidelity, Schwab, etc, then these institutions get paid from the fund even if you do your own trading. So if I’m with fidelity and I have fidelity manage my money for a 1% fee, fidelity will still earn income from the fund itself.
1 more thing to consider when buying a managed fund, you will be paying more in taxes each year because the turnover of imbedded stocks has a much higher turnover within the fund. Nobody looks at this stat. Some of my friends managed funds had over 400% turnover rate because they are always chasing the market. Whereas index funds have very low turnover rates.
There are many low cost index funds (fees less than .1%, normally around .02%) making 20-30% and more during the last 6 months in low risk holdings, or if you are nervous about the market, you can make over 5% with no risk money market funds.

Your Fidelity contact person may be a ‘relationship manager’. You might ask for a Fidelity ‘financial planner’ or, if your contact is indeed a financial planner, you can ask for another one but it might be via phone only. If your Fidelity contact is not competent to be your personal financial advisor, then try to get to someone there who is.

A lot of discussions in this thread depend on the amount of investments one has because that drives the assets-under-management business model for the advisor. The more a customer has, the more attention they can get from an AUM advisor because advisors act on incentives, too.

The spectrum of advisor attention one gets ranges from a lot (such as a Trust Company with, say, at least $1 million AUM) to middle of the road (such as Fidelity and Vanguard with, say, at least $250,000 AUM) to little attention (such as Edward Jones with, say, $100,000). One percent of $1 million earns an advisor’s company $10,000 annually getting a customer more attention than 1% of $100,000 or $1,000 per year in AUM fees. I believe the companies who tend to be on the smaller end of the spectrum with a lot of $25,000 and $100,000 AUM customers tend to supplement their lower annual AUM fees with the income that you want to know in your original post.

I am curious. Assuming you still don’t want to pay AUM fees or loads, why ask about financial advisors (who don’t work for free)?

Even if you choose to make your own investment decisions, others may choose not or not have the knowledge. That leaves a bunch of financial services firms for these kinds of people. Financial service firms are regulated. But don’t depend on the government to provide all protections from investment managers. Like healthcare, investing is best done by spending time educating yourself. Those who don’t sometimes face a bumpy road.

Thank you for your informative post. Do you know if there are funds or stocks that are only available through an advisor? If that’s the case maybe there is some value there in using an advisor, assuming those exclusive funds are doing better than any other fund available to the general public.

There is no evidence of such superior performance over the long run.

No Commisions
 

Our advisor at Vanguard is a fiduciary and does not work on commission. He earns a very small percentage of the amount we have invested. To quote another company, “he does better when his clients do better”.

Hi, spinner1001,

Thank you for your contributions to this thread in posts #13, #16 and #19. (And you sure are right about that number #19 one-liner.)

Your posts are right about many things. Although I know the drill at Fidelity, as far as access goes, I will never reveal whether I have been invited to meet with someone on the top floor in those offices with that spectacular view of the city.

Even so, I really do appreciate your explanation of how Fidelity works because you are educating readers who take the time to see what you have to say.

Everything (almost) that you are saying here is a valuable part of the educational process that I am seeing develop in this thread. Seriously, I thank you.

But I am not sure why you are (kind of) coming at me in Post #17. . .I think I actually know why. It’s because you are not reading me — not on the page nor in-between the lines.

You do not have to read what I write. There will not be a quiz. But I wish you would have read me better if you wanted to criticize what I was saying. I have been at this for 30 years and I really, truly was “asking for a friend” who wanted me to look at the report she had received from her advisor.

I was not familiar with such an elaborate report, but I did a little recon where I could and saw some things I would question — although everything I saw was perfectly legal.

Anyway, we know nothing about each other, but I can see that you know some things about advisors and incentives. Thank you.

I am loving how generally educational this thread is turning out to be. Of course, I saw from someone here that old “why not ask the advisor” platitudinous, predictable line from one who cannot possibly have read the thread but cannot resist taking a shot. I can ignore that kind of shot. But although you took a sort of shot, I am very glad you are here in this thread helping to educate readers.

Boomer (who is no eejit and really is “asking for a friend)

Managed funds and fees versus no load:

1) The relative statistic for measurement is total return after fees and taxes, ie: what you get to keep. If you are not data and tax savvy, probably difficult to get to a good answer. The first question which you should be most interested in is the maximum drawdown annually versus the SP500, which may impact your future as personally shown below. The financial questions/analysis for evaluation of portfolios at the end.

2) The most important information from the prospectus is the fund's goal and benchmark index.
If the fund is 100% equities against equity benchmarks, and long only, then probably won't be worth the expense, as the difficulty in beating the sp500 is very difficult for most.
If the fund is a special situations fund, long/short, then the fund is high risk and not worthy of anything than a small single percentage of thought for diversification, but has a better chance of beating the SP500, though not guaranteed.


3) IMO, the primary reason to invest in a managed fund is to reduce your draw down in a market downturn.
Example, I had two more IRA withdrawals, the second one being all remaining, from my mom's sp500 indexed annuity. I took the first withdrawal in December 2022, when the market was down 20% or so. The loss of fund total value was two months of dementia care costs. The loss was also so big that after the withdrawal the recovery of the lost amount with the remaining funds was over a 50% return before the final withdrawal, just due to timing. If i could have avoid that loss, i would have been very appreciative. The only upside is that I paid total 1% (virtually zero) total taxes on both withdrawals.

4) I took a python course from a managed money / bank programmer, who showed us the code of the type of algorithms which the professional investors currently use. Many of these money managers are using machine learning (ML) to create high risk adjusted alpha (returns higher than their benchmark with high risk risk management scores, such as sharpe and sortino ratios).

5) Instead of buying load / managed funds, the better answer is to find an independent money manager, CTA designation, who uses ETF funds to create a custom portfolio for your risk tolerance, and rebalances at least quarterly and not annually. I have no information for CTAs.

6) Here is a sample of the JPM efficient 5 ETF portfolio which rebalances monthly. Yes there will be taxes, but you will probably a lower drawdown than the SP500, which should be the number one evaluation metric in retirement, as you have relatively little time to recover from lost values. The link pdf shows the "index" or the monthly return of the portfolio using the underlying allocation program of historical and actual returns.

https://www.jpmorgan.com/content/dam...Report_JPM.pdf

The information published is not timely enough to follow along yourself, but is a very good fund to benchmark any portfolio / fund manager's track record against.

Note, this portfolio invests in only a limited set of ETFs, with the weighting shown in the link pdf. JPM moves money between these ETFS based upon the program to determine risk level proportions.







good luck to us with retirement investments

Yes and no
 

There is no clear answer. Most fee only (charging a % on AUM) will buy no load funds for your portfolio. But just because it is a no load fund that does not mean they are not getting paid. There is what is known as a 12b-1 fee that the fund company can share with the advisor.
Dual registered advisors (registered as an advisor and a broker) will usually charge a lower AUM fee but also churn your portfolio to collect more load fees.

Hope that helped.

That "small percentage" adds up over time.

:mmmm:

Sure does. Forbes, before the family sold out, had some great articles on how the yearly cost of a fund including cap gain taxes, will affect your long term performance.

I was a long term subscriber until changes were made that lessened the value of the subscription to me so dropped it.

Financial publications such as Kiplingers personal finance should be required reading for anyone wanting to learn how investments work.

I don't pay any AUM, load, or 12b-1 fees. I only buy indexed mutual funds with no loads or 12b-1 fees. Investing is too important to trust a financial advisor or a mutual fund manager.

Just buy your mutual funds from Vanguard. Lowest fees in the industry, I have some Admiral funds whose expense ratio is around .18%

As I understand it, mutual funds have a large "loading" like administrative costs. That's why I prefer an ETF.

For a no load fund they just charge a yearly fee which includes their expenses of running the fund. There is no loading when you purchase their shares.

Vanguard mutual funds and ETFs are both extremely inexpensive, not large loading. I prefer the mutual funds to the ETFs because of the tax efficiency that they offer. Most people who buy mutual funds are "buy and hold" investors, so they are not trading on a daily basis, like ETF investors. This provides a more predictable investment environment that stabilizes the tax liability.

I suppose it was the ‘asking for a friend’ part and trying to focus the thinking, not personal criticism.

I thought that ETFs are more tax efficient. They only trade when the underlining companies are added/deleted from an index. Most conventional mutual funds trade more frequently which result in declaring larger annual (forced) capital gains.

Actively-managed non-index mutual funds (e.g., a Health Care mutual fund) are often LESS tax efficient for individual investors than a matching ETF. (Unlike, say, a passive S&P 500 index mutual fund.)

Managers of actively-managed non-index _mutual funds_ generally trade in and out and fund investors can get big taxable capital gain distributions from the mutual fund especially in a rising market even when they are buy-and-hold fund investors. Capital gains from _manager_ trading of a mutual fund get passed along to fund investors even when an investor has not sold their fund holding.

This tax treatment generally differs from comparable ETFs as ETF investors see the capital gains when they (not the fund managers) sell.

ETF managers are forced to sell shares to raise cash when a lot of investors sell their shares. This creates a taxable event.

Without doing the research, I'm really not sure which is more tax efficient. But, my thinking is that a fund manager is forced to sell stocks to raise cash when a lot of investors sell their shares. This creates a taxable event for all shareholders. People who buy ETFs are more likely than mutual fund investors to buy and sell shares frequently, thereby creating more potential for taxable events.

Several years ago, I compared the tax efficiency of the Vanguard S&P 500 index fund to the Fidelity S&P 500 index fund and found that the Vanguard fund was significantly more tax efficient. I attributed that to Vanguard having more buy and hold investors than Fidelity.

Thanks. I neglected to say that I never invest in actively managed, non-index funds. I only invest in index funds, and I am mostly a buy and hold investor. I am just not interested in paying extra fees to a stock picker who manages a stock or bond fund.

Generally, this is not true. ETFs generally have beneficial tax rules eliminating or reducing capital gains in a sell-off. Details get technical.

Also, ETF investors are buying and selling from each other on a stock exchange. If A is selling 100 ETF shares, the buyer is almost certainly another investor, and not the ETF manager.

I agree, except that there are times when there is a large stock sell-off. In those cases, the ETF manager will be forced to sell stocks to raise cash. My only point is that investors in indexed mutual funds tend to be less inclined to participate in a sell-off. I looked at converting my Vanguard index funds to ETFs, but I did not see a significant advantage to doing so. The expense ratios for both investments are extremely low.

And you may have triggered capital gains taxes for yourself by selling your Vanguard index funds in converting.

Moral of the story for all of this -- it's complicated.

I had never heard of trailer fees, incentives paid by some mutual funds to some advisors.

Boomer