What kinds of fees can you expect to pay when working with a financial advisor?
Most financial advisors in Shanghai will talk to you about insurance-based regular savings programs. For the vast majority of households, this type of investment program is the most appropriate for your needs and long term goals. But how much are you paying? It’s sometimes hard to identify the real price, because fees and charges are hidden among the clauses of a fairly complex contract document. Here are some starting points for your discussion with the IFA you are working with:
1) Commission vs. Fee-based advisors. Commission systems are favored by 2 groups of people: those not buying and those about to buy. Non-buyers like commissions because they don’t have to pay for answers. People in the process of buying like commission systems because they get unparalleled levels of service. Who doesn’t like commissions? Those who have just made the purchase. Because commission-based sales organizations get paid on the products they sell, the direct charges are very visible and can appear quite high in isolation.
2) Front end vs. Back end. Financial services fees can be applied in two ways. Sometimes fees are levied on the amount you are investing. The fees come “off the top” and your invested funds are reduced by the amount of the fee.
Back-end fees work just the opposite way. 100% of your investment is applied to the target fund — but you are charged when you withdraw your funds or take distributions. The good news is that your payment isn’t coming unti8l the far, far distant future. The bad news it will be much higher than an upfront fee.
3) ICP vs. FUM. Long term financial contracts — particularly those of the insurance variety — tend to designate a set Initial Contribution Period, or ICP — that often carries higher fees than the rest of the balance due. The logic is that these long-term savings plans are expensive to set up but cheap to maintain. By designating the early period of the contract as an ICP, managers can better isolate and allocate fees. Investors who stick with the plan are rewarded with lower fees over the life of the investment plan. A related concept is Funds under Management, which includes everything invested AND all the gains made. Many products combine and ICP and FUM fees in differing proportions — so know what you are getting involved in before you sign.
5) Other. Is that all there is? Nope. Marketing departments in Zurich and the Caymans are burning the midnight oil trying to figure out new ways to charge you, fee you, or find some way to separate you from you r money. Be on the lookout for little fees like contract fees, policy fees, management fees, and switching fees. Sometimes they are insignificant, like the $7 per month policy fee charged by one large European insurer. Other fees, such as charges for switching from one fund to another, can mount up in a hurry. Ask about everything, and don’t be afraid to look naïve.