How do you invest? What do you really pay? At the end of the
day, what are your real results? These are questions smart
investors should be asking themselves (but usually don't). In
this era of more fees, misc. charges, holding periods and back
end redemptions, even at discount brokers, how are you really
making out?
Working with a new client brought this all to my attention. I
know what I found may not apply to everyone; however it will
apply to many and very likely apply to you.
I need to preface this by saying that, unlike the majority of
registered investment advisors, I have built my practice over
the past 15 years by dealing with “small” investors. Many of
them are first timers because my minimum account size is only
$5,000.
I targeted this group because I enjoy the educational part of
my business. A happy side benefit has been that by providing
million dollar service to these so called “small” investors,
they naturally refer me to parents, relatives, friends and
business associates, often with considerably more assets than
the original client. What a happy consequence.
Having set the stage, here’s what happened with my new client
who we will call John. John was 26, newly married with a one
year old son. His wife was taking care of the child and John
had a good full time job. After selling his house in California
and moving to Florida he had $6,000 left for starting a
long-term investment program.
Though he had been reading my newsletter for about a year, John
decided to manage his 401k on his own. It was a noble effort but
provided less than desirable results.
He then attempted to set up a brokerage account at a major
discount broker. With his $6,000 he was told that the quarterly
fee would be $45, and, of course, if he sold any mutual fund
within the first 180 days, there would be an early redemption
fee.
$45 per quarter would be equal to an annual fee of 3% of his
starting balance. John called me somewhat frustrated and said
that he’d be willing to set up an account with me, but how
would it make sense if in addition he’d have to pay my advisory
management fee?
That was a good question because it certainly doesn’t make sense
to have an account in any type of market environment and pay
about 6% in fixed annual fees.
However, what John didn’t know was that if you have an account
with a registered investment advisor who is affiliated with
custodial broker, the fee structure changes.
What did that mean to him? It meant that I opened the account
for him as a new client. He now has no annual fees, other than
my management fee, and his 180 day holding period for mutual
funds is reduced to 90 days, minimizing, if not eliminating,
the likelihood of an early redemption fee.
The net result was that he would receive the benefit of my
experience—which he already trusted based on my track record of
pulling clients out of the market in October 2000—and it would
cost him no more, and likely less, than his discount brokerage
account.
Needless to say, John was very relieved. In essence, he traded
broker garbage fees for professional management at no additional
cost to him.
And, since he itemizes his deductions on his tax return, all
fees paid are tax deductible, which is just an added bonus to
factor into the equation.
It turned out to be an all around win-win situation for John.
I encourage you to review your situation and see if what looks
like a discount in fees is actually costing you a premium.
Copyright 2004, Ulli G. Niemann
Ulli Niemann is an investment advisor and has been writing about objective, methodical approaches to investing for over 10 years. He eluded the bear market of 2000 and has helped countless people make better investment decisions. To find out more about his approach and his FREE Newsletter, please visit:
http://www.successful-investment.com
