Fees in Financial Advisory


Fees in financial advisory can be confusing for clients.  This document is designed to help prospective clients understand how fees are generally assessed.


The Advisor Model vs. The Broker Model 

There are two basic types of advisors, independent financial advisors and brokers, and the two are generally paid differently.  Advisors are paid directly by their clients, the same way that an attorney or accountant would be paid.  Clients therefore know exactly what their advisors are earning for their engagement.  Brokers are paid either directly through commissions on transactions, or indirectly through a form of “kick back” or “fee sharing” with funds in which they place clients’ money.  In this latter case, clients usually do not see what their broker is charging – and many people make the naïve mistake of believing that the broker is earning nothing!  Advisors therefore claim - with some justification - that their services are delivered more transparently than are brokers’.  As an independent advisor, obviously I believe more in this model of compensation.


Mutual Funds and Fees

Advisors and brokers both may use mutual funds for their clients.  But the costs incurred by their clients are different.  To understand this, it is important to first understand mutual fund share classes.

Mutual funds often issue different classes of shares to be marketed to different types of clients.  A standard set of share classes are classes A, B, C, and I (Institutional).  Each of these share classes holds the same portfolio and they are managed identically, but they differ in the fees and charges that are assessed to acquire and sell the shares.  Some of the classes will have a front-end load, a one-time sales charge to acquire the shares.  Some will have a back-end load (or a “deferred sales charge”), a one-time sales charge to sell the shares.  Some will have 12b-1 fees, ongoing annual fees paid to “distributors” of the funds (such as brokerage houses).  All will have annual management fees, though these will differ between classes. 

Let’s look at a real example.  The following are fees for the various share classes of the Pimco Total Return Bond Fund, the world’s largest and most famous bond fund.  Look at the table - which share class would you most like to own?



Front End

Back End

12b-1 fee

Mgmt fee

Used by

Class A






Class B






Class C






Class I







Most people would prefer Class I shares, as they have no front-end, back-end, or 12b-1 fees, and their management fees are lower than the other share classes.  How can you get Class I shares?  If you have a broker, chances are good that you will be put into one of the other share classes – often Class A shares – because that is how the broker is paid, through a fee-sharing arrangement with the mutual fund sponsor (which of course influences the opinion of the broker about the suitability of the fund for your account).  You get Class I shares by working with a good independent advisor, who will often place their clients in Class I shares, and who has no financial interest in the fund and can therefore evaluate its suitability more objectively. 

You may wonder if you can purchase Class I shares yourself as a retail investor – you can’t, they are only offered through qualified financial intermediaries, like advisors.  As you can see, an advisor can achieve substantial savings for you in their use of Class I shares.


Bonds and Fees 

Many people who have invested in bonds with brokers naively believe that there is no fee to buy and sell bonds, since bond trade tickets usually reflect no commission charged.  But many investors are not aware of how bonds are bought and sold.  While stocks trade on an exchange, and everyone as a result receives the same market-clearing price, there is no exchange for bonds.  Bonds are instead procured or sold by brokers, and the commission that they earn for doing this is called the “spread,” the difference between what they buy and sell a bond for.  For example, a client may ask for a price on a bond, their broker will go and find out what the bond will cost – say $99 – and will then quote an amount higher – say $100 – to the client.  The spread is therefore $1, and is pocketed by the broker as a fee.  Conversely, a client may ask for bids to sell a bond, and the broker may discover that a buyer will pay $100, and quote a sales price to the client of $99, again a $1 spread.  Spreads in some bonds can be quite high, and it is rare that clients know what profit a broker is making on bond sales.

I prefer bond funds, because the managers of top bond funds are expert at managing bonds and at buying and selling bonds – it is all they do every day.  When a top bond fund enters the market to buy or sell with the help of brokers and dealers, they have substantial leverage in negotiating narrower spreads than the average retail investor.  I therefore attempt to deliver to my clients Class I shares of top bond funds, rather than attempt to do business directly with bond dealers.


Commissions on Trades 

Some securities, such as stocks and exchange-traded funds (ETF’s), incur commissions when they trade.  Advisors generally seek the best and lowest cost execution for clients, often at low-cost brokerages like Fidelity or Schwab, since they have no financial incentive in commissions.  Many brokers, however, are compensated with commissions when they place trades, and their incentive is therefore to place frequent trades at elevated commission levels.  This “busy work” often results in worse portfolio performance, since trades may be made simply to generate commission fees rather than to enhance portfolio structure.  


Advisory Fees 

Rather than through any of the already discussed fee mechanisms, the only way that an advisor is compensated is through an annual advisory fee, paid directly by you the client, often directly from your investment accounts.  Fees often are based on a percentage of total assets under management.  Generally, more modest accounts may incur about 100 basis point fees (1.00%), more substantial accounts may incur 50 basis points (0.50%), and very high net worth accounts may pay around 25 basis points (0.25%).  Every advisor, however, sets their own fees, and they may be different in numerous ways.  For example, I generally set a regular fee the first year of working together because there is much more work to do.  Thereafter, as our workload decreases, my fee generally declines a bit until it reaches a floor where it remains.  It is thereby my intention that clients pay only for value and services rendered.

As the general public learns about the more transparent advisor model, many brokers have tried to change their business over from the commission and load-based model, with mixed success.



The following chart summarizes the fee environment for a hypothetical $500,000 account (larger accounts would experience yet lower fees).  As you can see, average total fees for an advisor hover around 100 basis points (1%), with the advisor being paid an advisory fee and relatively low cost fees paid to fund sponsors.  A broker may charge substantially more, but the irony is that a client never actually sees many of the charges as they are hidden within the fund structures themselves.


And what do you get for less overall fees from an advisor?  The amazing thing is that even though your overall fee structure may well be substantially less with an advisor, the range of services that you receive is far greater, and is often delivered by a more credentialed and qualified individual with a major industry certification such as Chartered Financial Analyst (as I am certified) or Certified Financial Planner.  Advisor services often include not only investment management but also financial planning, estate planning, insurance planning, real estate planning, business planning, expense management and budgeting, charitable planning, life planning, and more.  Brokers, however, are often focused solely on investment management, and often in a more myopic way, with their attention solely on assets maintained in their firm’s accounts.  Advisors, therefore, often deliver a greater array of services for a fairer and more transparent fee.

The independent advisor model is designed to align the interests of the advisor with the interests of the client, and to deliver true value to investors of all means.  In the 2008 financial crisis, with the dereliction of much of the brokerage industry tied to Wall Street, the independent advisory model grew strongly as investors sought untainted objective advice from real fiduciaries.  The fiduciary advisor’s direct compensation model produces the incentives to render objective and conflict-free advice.  No one expects their physician, attorney, or accountant to provide anything except conflict-free advice, and people pay these professionals directly for that right.  When it comes to your entire wealth, you should receive the same.  With New Capital Management, you will.