I am working with a financial advisory firm that a friend works with. The firm recommends investing in funds with a 2 percent buy-in fee. The firm gets a commission on that and they also get a commission on the yearly management fees that the funds charge which is 0.63 percent.
The advisors have pointed out that the funds I will be investing in will be in managed funds that have done well over time and that I will get their guidance and oversight in managing my funds. I am concerned about conflict of interest with an advisor in a commission-based arrangement. Are these fees reasonable, or am I being taken advantage of?
No, your advisor is not charging reasonable fees. High fees can squander your returns. Managing your costs is one of the key principles for long-term investing, and in many cases can even be the most important one.
The buy-in sounds like a sales charge, not necessary. Justifying it as paying access for supposedly a fund that has done well over time is misleading. What does “done well” actually even mean? And you don’t need to pay a sales charge to have access to low-cost, high-quality funds that track the market, like those from Vanguard. Their index funds consistently beat the more expensive active funds over the longer term. Consider also Dimensional funds, which you can only find through an approved Dimensional advisor. They are considered among the best in the industry.
On the surface, that .63% management fee may be reasonable (unless you have millions in assets under management there); however you haven’t mentioned your portfolio turnover rate. Am wondering if your advisor has been advising frequent changes your holdings, ie selling this fund, buying that one, selling this stock, etc. In aggregate, all of these actions generate more fees and commissions, trickling up wealth from your account to theirs. Although it’s difficult to know exactly what approach this advisor uses for investing, I agree with the few others in this thread who recommend that you seek a second and third opinion. Look for a fee-only, fiduciary investment advisor. He/she will work in your best interest, no commissions, no sales-agenda. Good luck.