From Our Blog:

Is Your Portfolio Ready for the Masters?

Did you know that if your portfolio misses a putt by this much, it could cost you over $20,000 a year?

It is that time of year again at Augusta National and to win the Masters, a golfer needs to be at the top of his game, having made all the necessary preparations.

The PGA golfers entering the Masters Tournament have practiced and prepared for countless hours to achieve great heights in their profession. Nevertheless, even with all the preparation, if a crucial putt stops short of the mark, they could miss out on their chance of winning the green jacket and a significant amount of earnings.

Consider the putt pictured above, we estimate the ball stopped short by 1-2% of the total distance traveled. Likewise, if your portfolio only achieved 98-99% of its objective each year, you could be leaving a significant amount of money on the table over time.

Is your portfolio paying too much?

If you are like many people, you might not feel comfortable managing your investments completely on your own. There are many experts in the financial services arena who have the skills to manage your investments, but not all asset managers are the same. One major area of difference is how they price their services.

For the sake of this article, we will consider one of the major pricing differences between a broker-dealer, or “broker,” and a registered investment advisor (RIA).

RIA vs broker-dealer pricing

You will typically pay a broker-dealer a commission for each transaction made on your behalf. While brokers are expected to make appropriate investment recommendations for their clients, they do not have any legal requirement to do what is in your best interest. Further, because brokers are incentivized to earn a commission, many argue their decision making becomes conflicted.

On the other hand, registered investment advisors are often paid an annual advisory fee based on a percentage of the client’s assets under management. There are no commissions for registered investment advisors, thus their advice is not motivated by any self-interest. Moreover, registered investment advisory firms are registered with the SEC and are required by law to act as a fiduciary to clients. Fiduciary responsibility means the advisor has a legal obligation to always act in the best interest of the client.

A closer look at mutual fund fee pricing

This disparity in how fees are charged becomes even more detrimental to your portfolio when you look at the price difference in mutual fund fees. This is largely because broker-dealers and RIAs buy and sell different types of share classes when it comes to mutual funds. Although each share class of a mutual fund holds the same underlying securities, their fees are structured differently. The share classes that brokers buy and sell typically have higher expense ratios, and in some cases, also charge additional annual fees (kickbacks) paid to intermediaries (including brokers) for marketing and distribution.

On the other hand, registered investment advisors can buy and sell the lowest cost “institutional” share class.

Regsistered Investment Advisor (RIA) share class valueAs you can see, investing with an RIA could save your portfolio up to 1.23% on the expense ratio annually. Over time the lower fee structure of an RIA can increase portfolio returns dramatically. In this analysis, the difference in fees for one year of a hypothetical $2 million portfolio could be $24,600. Who would not want to have an extra $24,600 in their pocket?

Here’s how fiduciary duty can impact pricing

The bottom line? RIAs have their interests aligned with their clients and are legally bound to act in their clients’ best interest. For one, this implies they are legally obligated to choose the most advantageous, lowest total cost share class.

Further, an independent RIA can evaluate a wide range of investments and select the best fit for the client. RIAs also work with clients on all aspects of wealth management, such as tax, estate, education, and retirement planning. This integrated approach is often attractive to high-net-worth individuals.

Make sure your portfolio is making all the putts

There are many outstanding wealth advisors out there, including many brokers. It is important that you feel comfortable with who is managing your money. You will want to take into consideration their track record, education, and experience, but you will also want to consider how you will be charged for their services. Who you work with could influence how much money stays in your pocket.

Don’t leave your portfolio’s putts short. If you are concerned about how much you are paying in fees, contact us for a complementary portfolio review.

the masters put
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Is Your Portfolio Ready for the Masters?

Did you know that if your portfolio misses a putt by this much, it could cost you over $20,000 a year? It is that time of year again at Augusta National and to win the Masters, a golfer needs to be at the top of his game, having made all the necessary preparations.[…]

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