Where Do Your Fees Go?

When evaluating the fees paid for an Investment Portfolio, it’s important to understand the different fee levels and who they are paid to. Generally, there are three types of fees that can be charged to portfolios:

  1. Investment Advisory Fees
  2. Investment Manager/Fund Fees (mutual fund expense ratios)
  3. Execution or Transaction Fees

Investment Advisory Fees are paid to the portfolio’s investment advisors for their services. These services may include portfolio management (manager/fund selection and asset allocation strategy), providing performance reports for the organization’s board and staff, trading to ensure the portfolio is invested pursuant to the Investment Policy Statement, and assisting with developing or strengthening the investment or reserve policies. These fees can be charged as a percentage of assets in the portfolio or as a flat fee.

The Investment Manager/Fund Fees are the fees charged by the manager of the investment vehicle selected. These fees will vary based on the investment strategy and type of investment vehicle chosen. Investment Manager/Fund Fees will always be charged as a percentage of assets.  Mutual fund and ETF fees are expressed as the fund’s expense ratio.  These fees are deducted directly from the fund’s return.  As a result, investors aren’t always aware of the fees they pay at the fund level and they can be challenging for investors to calculate.  As a result, we suggest asking your advisor for the “weighted average expense of the managers/funds” in the portfolio.

Execution Fees are the transactional expenses charged by the broker/dealer for the account. These fees are typically charged per transaction or per trade.  Transaction fees for certain funds may be waived or “wrapped” into the funds expense ratio or into the advisor’s fee.

When assessing the reasonableness of fees, it can be helpful to compare your portfolio’s fees to a relevant peer group.  It’s also important to understand the value that has been delivered, regardless of how high or low the fees may be.  Having an objective, blended policy benchmark to identify the portfolio’s performance expectation is critical to understanding the value-add of various investment strategies.

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