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. 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, 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.
Assessing total portfolio cost
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.
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.
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.
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.
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 get 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.
