By Tim Simon, Client Advisor
I’ve spent my career cultivating relationships with high-net-worth individuals, family offices, and institutions, in both public and private investing. Through that experience, I’ve learned there are a few things a client should aim to control as an investor: tax optimization; overall allocation; and portfolio costs. Ferreting out the total cost is a smart place to start to determine the true value of a client’s investment portfolio. Because there’s no controlling the market, clients should control what they can, especially when it comes to enhancing net-after-tax and net-of-fees returns.
On the total cost side, even when appearing nominal, small fees can add up quickly. Investor education resources from the SEC also emphasize that fees and expenses can materially reduce investment returns over time. For example, if you pay 1.5% in total costs per year, after a period of 10 years, regardless of returns, it has cost you 15% to operate your portfolio. In generous years, that might not be glaring as fee impact varies with returns, contributions/withdrawals, and portfolio value, but in challenging years it stacks on top of losses, creating a higher barrier to recovering value. In my experience reviewing statements, I would say that nine times out of 10, there are costs and tax leakage prevalent in broker-dealer models that individuals are not cognizant of as it is not visible on their statement.
“Nominal, small fees can add up quickly.”
Potential fees during the investment process
While the exact cost structure and applicable fees can vary between firms, platforms, and investments, regulators such as the SEC and FINRA’s Fund Analyzer resources provide investors tools to assess common investment fees and expenses.
When assessing fees and costs associated with your investments, there are three primary things we at Caprock look for from other firms. First, there’s the advisory fee that is charged based on the total value of assets. This charge is standard across the industry and prudent investors will shop around for the lowest cost vs. value. Second, we look for a Separately Managed Account (SMA) fee. This means a third-party manager is paid on top of the advisory fee. Third, we look for product costs, which are the total costs involved in creating a financial product and getting it ready for sale.
In public markets, mutual funds, ETFs, structured products, and all different types of publicly listed products can charge their own fees. In both public and private markets, brokers can charge placement fees, in some cases up to 4% of the subscription or investment amount.
Assessing total portfolio cost
A thorough fee review should look beyond the stated advisory fee and calculate the full blended cost of the portfolio, including advisory fees, SMA fees, product expenses, fund-level costs, trading costs, placement fees, redemption penalties, tax drag, and any stacked fee layers. When another firm or manager is also charging a fee, the analysis should show the combined blended cost and then break out each component so investors can see exactly what they are paying for and where value is—or is not—being delivered.
On the tax side, mutual funds have discretion on selling, which can create unnecessary potential capital gains or losses. Also, some brokerage firms only offer mutual funds from fund companies that pay marketing services and support fees. Additionally, mutual funds, UITs (Unit Investment Trusts), and semi-liquid alternatives carry different fee structures, making allocations more expensive than owning the securities outright or going direct. More often than not, they carry higher trading costs, expense ratios, and placement fees.
One way to reduce unnecessary costs is to be intentional about implementation. In efficient public markets, for example, a lower-cost passive or index-based approach may be appropriate for core exposure, while active management may be reserved for areas where it has a clearer potential to add value. The goal is not simply to find the cheapest option, but to avoid paying active-level fees where the investment case does not warrant them.
In UITs, specifically, there’s a force selling provision, and semi-liquid private funds can contain early redemption fees and other costs. And if the investment is made through a “feeder fund,” you may pay “stacked fees.” Additionally, when you receive a statement, it’s sometimes messy, difficult to interpret, and challenging to break apart, with asset classes sometimes being misclassified or showing up in the wrong place.
Where hidden costs become visible
This is why consolidated reporting matters. For families with multiple advisors, outside accounts, private investments, trusts, entities, real estate, liabilities, and capital commitments, costs can be scattered across statements and difficult to see in one place. A total-balance-sheet view can help reveal hidden fee layers, misclassified assets, concentrated exposures, and liquidity constraints that may not be obvious from any single statement.
| Fee or Cost Area | What to review |
|---|---|
| Advisory fees | The annual advisory fee and how it is calculated across accounts, entities, and asset levels. This is usually disclosed in a summary slide or in the back of the statement. |
| SMA and manager fees | Separately managed account (SMA) fees, sub-advisor fees, and any third-party manager charges layered on top of the advisory fee. These are often bifurcated depending on the broker/advisor firm. |
| Fund and product expenses | Product costs can vary across different security types. Expense ratios, product-level costs, structured product fees, mutual fund expenses, ETF costs, UIT fees, and semi-liquid alternative fees. If it’s a publicly traded structure, the prospectus is the source of truth. Always check the different share classes. |
| Placement fees and commissions | Subscription fees, placement fees, one-time commissions, revenue sharing, soft dollars, or other third-party compensation can be found in subscription agreements and disclosures. |
| Trading and transaction costs | Trading costs, bid-ask spreads, turnover, custody charges, and transaction-related expenses. Look in trade confirmations, custodial transaction history, account activity reports, manager reporting, and any brokerage or platform fee schedules. |
| Tax drag | Realized gains, fund distributions, tax-inefficient trading, and investment structures that limit tax control. Look in annual tax documents, realized gain/loss reports, mutual fund distribution notices, Form 1099s, K-1s, capital-account statements, and manager tax packages. |
| Liquidity terms and redemption penalties | Lockups, gates, redemption windows, early redemption fees, and liquidity constraints. Look in subscription agreements, private placement memoranda, fund operating agreements, offering documents, quarterly letters, and investor notices. |
| Stacked fee layers | Feeder funds, fund-of-funds structures, embedded manager fees, and other layered investment vehicles. Look in fund organizational charts, subscription documents, offering memoranda, audited financial statements, capital-account statements, and fund expense disclosures. |
| Actual blended portfolio cost | The combined cost across advisory fees, manager fees, product expenses, tax drag, trading costs, and embedded fees. Look across the advisory agreement, billing statement, custodial statement, investment statements, product documents, tax reporting, and consolidated reporting platform to calculate the full blended cost. |
Watch out for red flags
If an investment sounds too good to be true, it probably is. This is a major red flag. Investing is challenging, so take the long view. Fast money can be lost as quickly as it is made.
Another red flag is owning public equities through a manager who has no interest in the fact that the investor must pay a big tax bill every year. Conversely, if the investor owns the securities outright, the investor controls their tax outcome. Also, be on the lookout for complex structured notes or equity-linked strategies, which often have hard-to-spot costs.
Beyond that, the share class in each investment, public or semi-private, is something we zero in on because there are many front-load fees that can be charged.
Investors should also understand how their advisor is compensated. Start by checking the SEC investment advisory disclosures website. An advisor who receives commissions, placement fees, revenue sharing, soft dollars, carried interest, or other third-party compensation may have incentives that are not immediately visible on a statement. At Caprock, our compensation comes from the advisory fees paid by our clients; we do not accept placement fees, commissions, revenue sharing, soft dollars, carried interest, or other third-party compensation. That structure is designed to keep the focus on the client’s net outcome, not on product economics.
Ferreting out the fees and costs that are part and parcel of a portfolio can be a real challenge, especially for the average person. It is important to strip away unnecessary costs to maximize returns, and the only way to do this is by understanding what you are paying for.
Request a complementary, thorough fee analysis of your portfolio.
About the Author
Tim Simon is an advisor for Caprock. His experience in the financial industry involves establishing, cultivating, and managing partnerships with institutions, high-net-worth individuals, and family offices. Simon has a proven track record of raising capital for various vehicles and direct investments across the capital structure, allowing him to gain a thorough grasp of the expenses and fees associated with investing in both public and private markets.
The Caprock Group, LLC (“Caprock”) is an SEC Registered Investment Advisor. This communication is not an offer or solicitation with respect to the purchase or sale of any security and is for informational purposes only. Information contained herein has been derived from sources believed to be reliable, but Caprock makes no representations as to its accuracy or completeness. Investment in securities involves the risk of loss. Past performance is no guarantee of future returns. Registration with the SEC does not imply a certain level of skill or training.
