When starting Deep Blue Financial it was my intent to establish a policy of extreme openness concerning fees. I have always been a bit of a black sheep in the financial advising business; the “low cost” guy in a business that normally prides itself on being very secretive about expenses. Since fees that clients are charged come off the bottom line, the more clients are charged, the higher the likelihood that they will experience lower than average returns over long periods of time.
When determining advisory fees we looked across the academic world to find a comprehensive study that looked at firms like Deep Blue to determine what firms like us charge. Luckily a study that covered the topic was readily available. Here is a link to “Compensation and Client Wealth Among U.S. Investment Advisors” by Lukas Dean and Michael Finke:
My takeaways from the study:
- The small market is dominated by advisors who are charging commissions. Normally the small market is considered investors with assets under $100,000 who may need to find a broker who charges commission to get advice. The study found examples of lower net worth investors paying up to 8.5% in commission fees.
- Clients tend to feel more comfortable paying advisory fees vs. commissions; since they know what they are being charged, and can feel more confident that their adviser is recommending appropriate investments.
- One of the drawbacks of advisory fees is that it appears there is a tendency for RIA firms to avoid advising clients in a way that may decrease assets under management.
- The typical fee arrangement for RIA firms is as follows:
Under $1 million – 1.25%
$1 – $5 million – 1%
$5 – $10 million – 0.75%
- Most investors have no idea how much commission they are paying. The main cause of this seems to be that the investment fees are opaque.
- The median investor using an RIA firm has investable assets of $541,672.
Keep in mind that advisory fees are not the only fees that clients run across when investing money. If we focus only on non commission advisors, investors are normally paying three separate fees. Advisory fees, transaction fees, and fund related expenses. These three categories make up what I would refer to as a client’s total fee.
Looking at the expenses reported in the Dean/Finke study we can state that our advisory fees are roughly 20% below the average fee, our mutual fund and investment related expense is roughly half of what is average, and our transaction costs ($7 a trade) are at the very low end of normal. All in our clients land up paying just over 1% on average for our services, which is roughly half the total fees of what is average. Charging half the total fees of most other advisors is no guarantee of higher investment returns, but it is a good start.