Fee or Free?

I recently met with a client who let me know that he was suggesting to his brother that he too might wish to become a client of Sigma’s. The client noted to me, though, that, “He is also looking at a major brokerage institution, and they don’t charge fees.” I said to him, “You mean the broker works for free?” The client responded, “No, he gets paid, but he gets paid by the brokerage institution.” I stared at him until he came to his senses. He smiled sheepishly and proffered that indeed, the broker was being paid by his clients even though it was not readily evident how and in what amount. This is what we call transparency.

Just yesterday a client sent me his 401K statement for his employer, asking that I review it and determine whether any changes were in order (it was not an account that allowed outside advisors to manage). I noted that the statement showed the beginning of period balance, an entry for contributions, an entry for fees, an entry for investment gains/losses, and then the present balance. The “fees” section was blank, giving the appearance that there were no fees. Interestingly, in fine print next to this table of information was a comment that stated: “Your plan sponsor is paying for a portion of plan fees. Plan participants are also paying for a portion of plan fees.” A quick scan of the table might lead one to conclude, as our client did, that there were “no fees.”

The point? Buyer beware. There is no “free option” and when it appears so, make sure you ask the provider of the investment services what they are paid and how they are paid. Be prepared to be surprised.

All comments or questions are welcomed.

Bob Bilkie, CFA