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Average Investment Management Fees

When you are just getting started with an investment management company, it can be overwhelming to understand all the ins and outs, the fees, and what exactly your investment manager does. When you think about your daily life, from filling your gas tank to picking up groceries, there is a cost to doing business. Investment management is no different, and the fees associated with it can add up if don’t know what to look for and aren’t paying attention. Let’s take a look at typical investment fees and then find out what an investment manager does

Investment fees are not all bad. They cover some important costs to help ensure that your investments are managed well. You want to make sure you’re getting good value from your investments without letting excessive fees cut into your returns.  

You should never invest in anything until you understand how it works. And that includes investment fees. Your investment management company should clearly outline any fees associated with services and answer any questions you have about where the money your spending is going.

The average fee for a professional financial advisor’s services is 1.02% of assets under management annually for an account of one million dollars (the industry average fee is 0.95% and decreases depending on the size of your account).

There are several types of investment fees. Let’s review several of the most common fees you’ll come across when you start investing.

Loads (sales commissions)

If you are putting money into a Roth IRA, you’re actually buying shares in a mutual fund. The investment manager you’re buying those shares from will get a percentage of the money you invest, otherwise known as a load. When you see the word load, just think of a sales charge or a commission; there are three types of loads:

  • Front-end load: When you invest in a mutual fund with a front-end load, you are charged when you put money into your retirement fund.
  • Back-end load: Back-end loads are charged when you take money out of your retirement account.
  • No-load: With a no-load fund, you aren’t hiring an investment manager, so you don’t have to pay commission. However, when the value of your fund goes up, the expenses—like an annual maintenance fee—will cut into your profits.

Advisor fees

When you invest in mutual funds, you’ll either pay your investment manager through a load (commission-only advisors), advisor fee (fee-only advisors) or some combination of both (fee-based advisors).

Expense ratios (annual fund operating expenses)

You’ve paid your investment manager, now you need to help cover the costs of running the mutual fund. That’s where the expense ratio comes in. Several fees that make up the expense ratio:

  • Management fees: The stocks that make up your mutual fund aren’t there because of magic. Your investment management company makes sure that only the best investments make the cut. These fees help them manage the fund well.
  • Distribution and service (12b-1) fees: These fees pay for the fund’s marketing costs—how much it takes to promote the fund.
  • Administrative fees and operating costs: These cover things like salaries for the fund’s managers, record keeping and research. Some funds are more expensive to run than others which will impact how high or low the expense ratio is.

Now that you know more about the potential fees, what does an investment manager do?

Investment management companies are designed to clarify, simplify and maximize potential returns on clients’ investments. Various investments are used to help clients reach their unique goals. Often investment managers will focus on three key areas:

Create Income for Retirement

Most of us intend to save for the day we retire or just slow down a bit. Making sure there’s enough steady income to live on, where it comes from, how much is needed, and how it affects taxes are just a few of the things that need to be addressed. Your investment manager is well experienced in answering these questions and has helped create income for countless of retirees over the years. They will help plan and navigate your retirement journey.

Focus on Growth

You may not be ready for retirement and you want your investments to grow sufficiently so that when you are, the financial portions of the transition will be seamless. Determining the right balance between different investments is critical to long-term growth.

Consolidate and Coordinate

Very often people have so many varied investments that their portfolios become almost impossible to track, let alone manage. Investment managers help you coordinate and consolidate investments in ways that focus on increasing efficiency and reducing unnecessary complexity. They provide you with a detailed statement of all your investments that can be viewed on one page, helping them make better long-term decisions.

Investment companies will have a clear management process. Your investment manager will walk you through their particular process, but it typically involves these basics:

Review

The starting point for any portfolio is to review where you have your current investments. Your investment manager will try to keep it as simple and straightforward as possible, so you may be disappointed if you’re looking for an inch-thick book with a detailed analysis of your life history. You should expect a concise, easy-to-understand, one-page synopsis.

Plan

Your investment manager may determine some of what you currently have invested in is worth keeping, should be tweaked a bit, or maybe needs to go. They will address questions about taxes, growth, income requirements, and planning strategies. You will get a simple, easy-to-understand plan that addresses your specific needs, and the best ways to structure your investments to reach your goals.

Execute

No job is over until the paperwork is done. Your investment manager will assist in completing all the documentation necessary to execute your plans. They coordinate rollovers, work with you to complete applications, and monitor transfers of money. And, at completion, they provide you with copies of everything needed for your files. The investment management company staff is there to answer questions and provide assistance every step of the way.

Monitor

Managing investments is an ongoing process, and that includes the continuous monitoring, and assessing, of your investments as well as your investment managers performance. You should expect results, not just strategies. Your investment manager should encourage regular conversation to discuss performances of their investments, how they compare to market averages and your expectations, and if changes need to be made to the plan.

Investments

Asset Management vs. Investment Management

Do you need an asset manager? An investment manager? It can be confusing when you are searching out someone to help manage your money and are looking for the most appropriate professional to help you achieve your financial goals. At the end of the day, asset managers and investment managers work towards the same goal of making money for their clients but how they do this is a little different. Asset managers usually work with affluent individuals or companies that have very large amounts of money to invest. Investment managers may work with any individual or company interested in investing. Asset managers often focus on a specific type of asset investment, like real estate for example, and create a long-term plan to ensure their client’s investments appreciate in value. Investment managers may supervise daily transactions related to a client’s investments or they can focus on specific types of investments, such as stocks or bonds.

Asset Manager

Asset managers work with wealthy clients and handle their investments in things such as real estate or business ventures. In addition to finding investment options for clients they also work to find ways to save clients money or maximize their profits on existing investments. This requires they be detail-oriented and capable of making effective decisions.

Investment Manager

Investment managers may fill multiple roles. They can specialize in stocks and provide insight to their company’s research department about stock options for clients or they may focus on which investments to include in a client’s portfolio.

Why is investment management important?

Your investment manager is there to manage your investment portfolio. They will devise and implement an investment strategy to meet your goals, and then use that strategy to decide how to divide your portfolio among stocks, bonds and other investments. The manager buys and sells those investments for you as needed and also monitors your portfolio’s overall performance to ensure it stays on track with your goals in mind.

You may also find an investment manager that is also a financial planner. They can provide holistic financial advice for a variety of areas like cash-flow management, taxes, insurance and estate planning. Another option is a wealth manager, who often works with high-net-worth clients to manage their financial planning and investment management needs, as well as coordinate the services of other professionals, such as lawyers and accountants.

Investment management is important because it is very common to end up with an assortment of investment accounts — for example, you may have several IRAs, multiple 401(k)s from former jobs, or that brokerage account you opened on a whim. Investment management can organize your financial situation by consolidating accounts from different firms under one roof, allowing you to simplify and execute a cohesive investment plan.

When choosing an investment management firm, know that most require you to set up an investment account with them or at a brokerage they use. They will help you transfer your money from accounts at other firms, including retirement plan assets, IRA’s and any other financial account you are looking to streamline into your investment plan.

However, even if all of your investments are under one account, investment management is important if:

  • You want a second option about your investment decisions. You are not a financial expert and working with a professional can increase your investment confidence.
  • You need someone to keep an eye on your portfolio and rebalance assets when the mix drifts away from your finical goals.
  • You have complex financial issues, including things like family inheritance distributions, retirement-income planning, tax strategies or future legacy planning for your children and grandchildren.
  • You need an professional to help manage other financial needs. This may include things  like cash-flow planning, insurance decisions, portfolio distributions or debt management solutions. 

Your manager’s investment decisions are based on many factors, but they will start with your savings goal and your desired time frame. Savings goals can include things like emergency fund building, retirement, education, or large purchases like a home or cares. You will provide them answers and insight that helps them assess your risk tolerance, or your ability and desire to endure swings in investment returns and how you are prepared to handle stock market fluctuations. Your manager’s investment strategy is also informed by historical performance, market performance tax efficiency and investment fees – these are all taken into account when looking at your portfolio as a whole.

Managing investments is an ongoing process, and that includes the continuous monitoring, and assessing, of your investments as well as your investment managers performance. You should expect results, not just strategies. Your investment manager should encourage regular conversation to discuss performances of their investments, how they compare to market averages and your expectations, and if changes need to be made to the plan.