Summary/TL;DR
Due to a variety of “hidden” or inadequately disclosed fees, the total cost of working with a financial advisor regularly exceeds what clients think it is. Common sources of these costs include the expense ratios on actively managed mutual funds, sales loads, and the indirect costs associated with annuities and permanent life insurance. Over time, the cost of these fees, both direct and indirect, can easily surpass hundreds of thousands of dollars, making it extremely important that you work with an advisor who makes not only their compensation, but your total cost of working with them, as transparent as possible.
Introduction
Clients of financial service professionals are rarely told the full story when it comes to what they pay. Hidden fees and costs are abundant in this industry, and even those costs which can’t appropriately be called “hidden” are nonetheless inadequately disclosed. The long-term cost of these fees can easily surpass hundreds of thousands of dollars over the course of a long-term relationship with an advisor.
Common sources of these additional costs along with their long-term impacts are discussed in today’s post.
Expense Ratios
Expense ratios are ongoing fees charged by an investment fund to pay for its marketing, operating, and sales costs as well as to compensate its managers. They commonly range from 0.25%-1.00%+, and I’ve seen some mutual funds with 2.00% expense ratios. These costs are charged in addition to any fees charged by advisors and, for that reason, are almost never sufficiently disclosed to clients. Furthermore, they don’t appear as an actual charge on client statements, but are instead deducted from the fund’s Net Asset Value (NAV) before being reported to investors. In other words, the cost of owning the fund is “wrapped up” in its rate of return and is rarely, if ever, seen directly by investors.
These costs are one of the many reasons that I prefer index funds for my client’s portfolios. Compared to actively managed funds, index funds might as well be free to invest in, with expense ratios commonly ranging from 0-0.10%.
There’s another way that you “pay” when you invest in the actively managed funds that many advisors will put you in. These funds have a long history of chronically underperforming their passive benchmarks which, as we just discussed, as essentially free to invest in. Long term investors in actively managed funds, therefore, pay a hefty cost, both directly and indirectly, compared to those who opt for passive index funds.
Commissions
Mutual Fund Sales Loads
In addition to ongoing expense ratios, some mutual funds (depending on their “share class”) will pay the advisor a commission (known as a “sales load”) when their client invests in them. For “A shares”, this commission is commonly over 5% and is charged when the funds are originally invested. “C Shares”, on the other hand, pay the advisor on an ongoing basis. This means that the sales load is built into the fund’s expense ratio, translating to lower upfront costs but higher ongoing fees when compared with A Shares. C Shares are also commonly subjected to an additional charge if sold before a given period of time (usually one year) called a “contingent deferred sales charge” (CDSC). Sales loads and CDSCs, like expense ratios, are costs that are rarely adequately disclosed (assuming they’re even disclosed to begin with) to clients.
Fortunately, mutual funds with sales loads are becoming less common thanks to the widespread adoption of no-load mutual funds and exchange traded funds (ETFs), but I still see them from time to time. To know if you are invested in mutual funds with sales loads, look at your most recent investment statement for positions with five letters that end with an “X” look for the letter “A” or “C” at the end of their names. These represent the share classes of these funds.
Insurance Products
Permanent life insurance and annuities are products which pay their sellers hefty commissions which, again, are rarely adequately disclosed to clients. In addition to large upfront costs, these products also charge their owners with the cost of insurance, and the investments within them frequently carry expense ratios of 1.00% or higher. It’s common that I encounter annuities with internal costs exceeding 3.00%, less than half of which will ever be reported on a client’s statement.
Equally as disgusting as the expense of these products is their marketing. I’ve even seen some products marketed as having “no fees”, and because of the way the product is structured, the insurance companies are actually allowed to say this! The fine print, of course, tells another story.
It All Adds Up
In addition to presenting an obviously large conflict of interest, these products add a considerable amount to the overall cost a client pays to work with their advisor. At the typical financial advisory practice, a well-off client with a high income, large portfolio, or both, will frequently be exposed to at least one (and commonly all) of these products.
Even seemingly small fees of 0.25% or 0.50% from mutual fund expense ratios will add up over time. For example, a $1,000,000 portfolio charged 0.50% will be $390,000 smaller than a portfolio charged no fees after 20 years, assuming an 8% annualized growth rate.

Now, consider the fact that these products chronically underperform their benchmarks and you’re left with a scenario in which your portfolio is paying more and performing less than it should be. In the example below, the portfolio being charged a fee is also underperforming the portfolio without fees by 1.00%:

It’s no wonder that the average consumer is so skeptical of the financial services industry. After decades of not telling clients the “whole story” when it comes to fees, results, and services, people are understandably convinced that it will be easier to “do it themselves” than to find someone that they can trust. The risk with this, of course, is the high likelihood of making mistakes or overlooking opportunities that a seasoned expert would otherwise notice.
For this reason and many others, I have structured the cost of my services to be as transparent as possible. By charging a flat dollar amount and accepting no other forms of compensation (commissions, referral fees, etc), my clients know exactly what the cost to work with me is. And since portfolios are invested almost exclusively in index funds, their investment costs are also kept to a minimum. Over time, this will save them thousands of dollars in fees and commissions that they’d likely be charged elsewhere and, most importantly, establishes a strong degree of trust between us that serves as a foundation for a long and fruitful partnership.