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Assets Under Management - First Fee

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I've been considering signing with a particular investment firm.  They seem to have a good reputation and it seems they even donate some of their profits to charity.  They use an "assets under management" fee structure.  Now I know there are some strong feelings about this compensation method.  One thing I noticed in the contract is that they take the fee on new accounts immediately.  Even though AUM is not performance based, the justification for paying an investment firm is that they provide value-added services.  It doesn't seem right to me to charge a large fee before there has been any chance to add any value.  

I just wanted some opinion on this.  I'm not sure if this kind of thing is standard or if this particular firm is doing something out of the ordinary. 

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The purpose of using a firm like this is to have someone there to protect you from doing stupid shit that costs you money. That's what you pay for.

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I would consider simple indexing. Very few firms have the ability to provide consistent return above that of the total market in the long term.

In my mind, if this firm is charging you a large fee up-front, it speaks volumes as to their confidence in delivering a consistent market-beating return in the future.

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How big is your portfolio? if big, look at a firm that charges a flat fee instead of a percentage.


FPL Capital Management
Cardiff Park Advisors
Evanson Asset Management


Also, I'd be pissed if they charged me a higher fee to donate to charity. Charge me a lower fee and let me choose the charity I want to support.

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tjguitar85 said:   
Also, I'd be pissed if they charged me a higher fee to donate to charity. Charge me a lower fee and let me choose the charity I want to support.
 

  That stuck out to me too.  How could it possibly be a selling point for OP?

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neo1022 said:   One thing I noticed in the contract is that they take the fee on new accounts immediately.  Even though AUM is not performance based, the justification for paying an investment firm is that they provide value-added services.  It doesn't seem right to me to charge a large fee before there has been any chance to add any value. 
 

  You arent paying them for adding value, you are paying them to manage your money.  The fee you pay now is buying their management for a year.  Next year you'll pay another fee, or have the option of withdrawing your funds before the fee is charged. 

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neo1022 said:   I've been considering signing with a particular investment firm.  They seem to have a good reputation and it seems they even donate some of their profits to charity.  They use an "assets under management" fee structure.  Now I know there are some strong feelings about this compensation method.  One thing I noticed in the contract is that they take the fee on new accounts immediately.  Even though AUM is not performance based, the justification for paying an investment firm is that they provide value-added services.  It doesn't seem right to me to charge a large fee before there has been any chance to add any value.  

I just wanted some opinion on this.  I'm not sure if this kind of thing is standard or if this particular firm is doing something out of the ordinary. 

Question you didn't ask but important for you to consider:
Do you know what type of funds they will generally invest in? For example, will they invest in funds with load and/or high expense ratios? Just because they charge their free based on AUM, doesnt necessarily stop them from indulging in such shenanigans.

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Thanks for all the responses.  To answer some of the questions.

I believe they use DFA funds.  They told me they don't invest in those shenanigan type funds.

The reason why donating to charity was seen as a plus is because it shows interest in something other than pure profit.  You do have a point that perhaps their fee could be lower if they didn't do that.  The highest fee in the tier is 1%.  That's within the range of what I've read is an appropriate AUM fee.

They actually charge a separate advisory fee for clients without management services, or with a portfolio under a certain amount.  So, that's the service I would think would stop me from doing stupid shit.  That and the availability of index funds is kind of why I'm looking at investment management as "value add".  If I'm paying separately for the advice, then I'm looking for the 1% to bring something more.

It sounds like charging the fee up-front isn't as abnormal.  But, that doesn't mean this is a good deal for me.

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neo1022 said:   
I believe they use DFA funds.  They told me they don't invest in those shenanigan type funds.


 

  Don't sign with anyone before knowing how your money will be invested.
They can say stuff all day. Look at the plan material, find out what fees are charged for what.

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neo1022 said:   
The reason why donating to charity was seen as a plus is because it shows interest in something other than pure profit.

 

  I'd be willing to bet that donations to charity give them a tax writeoff that increase their profit margin slightly vs not making charitable contributions.

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neo1022 said:   

The reason why donating to charity was seen as a plus is because it shows interest in something other than pure profit.
 


 

  From The 20 Most Generous Companies of the Fortune 500 list
2. Walmart
3. Wells Fargo
4. Goldman Sachs Group
5. ExxonMobil
6. Chevron
7. JPMorgan Chase
8. Bank of America
9. Alphabet (Google)
10. Citigroup

http://fortune.com/2016/06/22/fortune-500-most-charitable-compan...

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Idk so I'll ask. Do you have 6-12mo shtf savings? What is this firms record the last year, 5yr, 10yr, 20yrs? Have the driving forces of firm changed? How old are they? How much cash % will they allocate in your funds or will you do that separately?

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neo1022 said:   I believe they use DFA funds.  They told me they don't invest in those shenanigan type funds.
 

  If they are truly going to invest all your money in DFA funds, based on your overall goals, risk tolerance etc., its isnt too bad to pay a 1% fee.
Link to WSJ article on DFA fund advisors
You can DIY using simple index funds and come out slightly ahead (per the article). However, the advisor could add value in other ways as pointed out by others. IOW, it is a pretty decent deal, particularly if you think you need help in this area.
neo1022 said:   It sounds like charging the fee up-front isn't as abnormal.  But, that doesn't mean this is a good deal for me.
 

  Charging the fee upfront in itself doesnt mean it is a bad deal. Most likely, they are doing the work upfront by looking at your individual situation making appropriate investment decisions (in DFA funds) for the year.

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Why pay 1% for dfa when you can get it for substantially less?

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tjguitar85 said:   Why pay 1% for dfa when you can get it for substantially less?
  You cannot buy DFA funds other than through specific advisors. 1% fee for such advisors is not uncommon.
Read the WSJ link in my previous post comparing performance of DFA funds with index funds. They do compare well; sometimes the better performance overcomes the 1% fee (sometimes not).

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You can buy dfa funds from dfa advisors that charge a flat fee. I already mentioned fpl capital management and a couple others.

Again, Why would you pay 1% when you can pay substantially less?

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tjguitar85 said:   You can buy dfa funds from dfa advisors that charge a flat fee. I already mentioned fpl capital management and a couple others.

Again, Why would you pay 1% when you can pay substantially less?

  I am not arguing he should pay 1%.
All I am saying is that DFA funds by themselves are pretty good. If OP is getting access to invest in them through this advisor and if they are going to diligently set OP up in an appropriate mix of DFA funds, a 1% AUM fee is not such a bad deal for someone who needs a financial advisor.

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