Fees are a natural part of paying for a service, whether you’re paying a mechanic to fix your engine problems or paying a firm to manage your money. Within our industry, however, fees have tended to be very convoluted, layered, and difficult to understand. Recently, there have been new reporting requirements stemming from several regulatory bodies in an attempt to have firms be more transparent in fee reporting – a positive for investors. So why are fees so complicated?
First, let’s talk about the different ways that fees can be charged. If you have historically worked with a financial advisor, they will typically receive a commission for the product that they are selling, let’s say a mutual fund, for example. These sales charges, or what is sometimes referred to as DSCs (Deferred Sales Charges), can be charged in many ways, but are typically done either on the front-end or back-end. Here is an example of what a front-end fee looks like: you have $100,000 to invest, but only $95,000 goes towards purchasing units of the fund, while $5,000 (if we are talking about a 5% front-end load fee) goes to the advisor. Additionally, that mutual fund would have an MER (Management Expense Ratio) attached, which encompasses a fund’s management fees, operating expenses, and taxes as a percent of the fund’s net assets in that year.
Opposite to this commission-based approach is a fee for service model which Portfolio Managers, including Capstone, employ. Using this model, a fee is charged as a percentage of the assets under management. While there can be variance in this amount, it is usually between 1% at the low end and 3% at the high end. This fee may depend on the amount of assets invested and other factors as well. As with our mutual funds example above, any funds administered by the firm, usually Pooled Funds or what are technically called Mutual Fund Trusts, would also have an associated management fee. These fees tend to be quite a bit lower compared with the fees on a Mutual Fund.
Capstone Private Wealth provides discretionary portfolio management to accredited investors with a management fee of 1.5% on the first 1 million and decreasing for amounts above that. Our fee schedule in its entirety can be found on our website. If you are in doubt as to what you’re paying now, ask. Fee transparency is key, and is something we at Capstone work hard to ensure our clients understand, since fees impact our clients’ bottom line.
Janet Kim Sing, Portfolio Manager
Capstone Private Wealth