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How to Vet Your Adviser

Don McDonald

As the investing advice industry moves from commission-based to fee-based, you need to be even more careful about who you choose. Thankfully, fee-based advisers must register with the Securities and Exchange Commission and my file an annual "plain-english" disclosure document call the Form ADV Part Two brochure.

You can find every registered investment adviser's (RIA) ADV online at:

adviserinfo.sec.gov

To search for your adviser click on the "firm" button and type in the firm's name (for example; Merrill Lynch). The larger firms often have many RIAs filed (Merrill's client service is buried on page two). Then find the plan you've been pitched (the big firm's have several) and head right to the fee section (it's in the table of contents). Finally, click on "Part 2 Brochures" in the left column:

In this case, we chose the "Merrill Lynch Investment Advisory Program." The fees are spelled out on page 16 of this 43 page document:

If you have less than $1 million being managed by Merrill in this account, the total annual fee charged will run over 3% per year. What a fee that high means is that your Merrill advisor would need to beat the market consistently by an average of 3% every year, forever, or provide a level of services that are the price of a decent car every year (for those with $1 million or more invested).

In the spirit of fairness and for comparison purposes, here is the fee section from Vestory's (our RIA firm) Form ADV Part Two brochure:

Like other Merrill and others, we use mutual funds – in our case, Vanguard, Schwab, and Dimensional Funds – to create our individualized investment portfolios. Yet, we are able to charge exactly 1/3 the amount Merrill Lynch charges for investment management and our fund (manager) expenses average just under 0.4% annually.

Let's assume a $1 million dollar portfolio with mutual fund or "style manager" expenses of 0.4% annually, invested in identical portfolios averaging a 7% gross return per year. How much difference do fees make over 20 years:

The person paying RIA fees of 2.7% per year would have almost $2.4 million.

While the one paying an annual fee of 0.9% per year would have just under $3.4 million.

Fees matter, to the tune of one million dollars. Is friendship or even a family relationship worth that much?