The Cost of Commissions.

If you’re working with an advisor who earns part or all of their income from commissions, just because you aren’t paying them an asset-based fee doesn’t mean you’re not paying them as much or more than the fees charged by fee-only advisors. By paying your advisor indirectly through commissions, you probably don’t even know how much you’re actually paying! Combine that with the inherent conflict of interest created by commission-based compensation, and it should be clear that working with a commission-based advisor is not in your best interest.

Costs Matter.

“We are left with one certain conclusion: investors who ignore costs are courting failure; investors who control costs are maximizing their chances of success. The long-term differences in the wealth they accumulate will be truly staggering. Why? Because for the former group, the magic of compounding returns is overwhelmed by the tyranny of compounding costs.” 1

John C. Bogle,
Founder and Former Chairman, The Vanguard Group

Your net return on an investment is merely your gross return minus your costs. Lower costs means higher net return, plain and simple. The graphs below show 1) the potential growth of a $100,000 investment 2 and 2) the specific costs incurred by clients of Sierra Wealth Advisors versus other advisors. 3

The total cost of investing with Sierra Wealth Advisors is only 1.05%, less than half of the cost of the alternatives.

Transaction Costs.

The most prominent of transaction costs are commissions, which are often incurred by do-it-yourself investors as well as investors working with commission-based advisors. Sales commissions on mutual funds not only create an inherent conflict of interest, but the costs to investors are unnecessarily high. Assuming an average load of 5% and fund turnover of 4 years, these investors bear transaction costs of 1.25% per year.

The only transaction costs incurred by our clients are brokerage fees, and a typical Sierra Wealth Advisors portfolio of asset class mutual funds would have only a dozen or so trades per year, at a total cost of approximately $300 ($25 per mutual fund trade). This represents just 0.03% per year on a $1,000,000 portfolio.

Advisory Fees.

While fee-only advisors avoid the conflict of interest that plagues commission-based advisors, many fee-only advisors charge just as much. Clients of other advisors not only pay more on average than our clients, but they receive a narrower range of services for their money (i.e., financial planning and other non-investment advice generally incurs additional fees).

The following graph shows the median fees charged by fee-only advisory firms 4 and those charged by Sierra Wealth Advisors. For example, a client with $2,000,000 of assets would pay other fee-only advisors an annual fee of 0.75% on average, versus a fee of 0.50% at Sierra Wealth Advisors. On that $2,000,000 portfolio, that’s a savings of $5,000 in fees every year!

Mutual Fund Expenses.

In 2006, the average individual investor paid mutual fund expenses of 0.93% for U.S. stock funds, 1.07% for international stock funds, and 0.81% for bond funds 5, resulting in a weighted average expense ratio of 0.91% (see table below). However, the weighted average expense ratio of a typical Sierra Wealth Advisors portfolio is only 0.32%, representing a savings of 0.59% per year, if not more.

Trading Costs.

Just as individual investors have to pay transaction fees when they buy and sell securities, so it is for mutual funds too. Unfortunately, the trading costs incurred by mutual funds are not only very substantial, but they are the least transparent of all the costs of investing. Much to the detriment and surprise of investors, trading costs are not included in the published "expense ratio" of mutual funds. In fact, while some mutual funds report their brokerage commissions (typically buried deep in the fund’s Statement of Additional Information), such commissions are only part of the picture. Research indicates that the average equity mutual fund incurs total trading costs of 0.96% per year, effectively doubling the expense ratio! However, in order to accurately reflect the trading costs incurred by the average investor, these costs need to be weighted by net assets. Unfortunately, even after that, the results are still a disheartening total of 0.48% per year for actively managed funds. In contrast, index funds (which have turnover and trading costs similar to the asset class mutual funds used by Sierra Wealth Advisors) have trading costs of only 0.06% per year, representing a savings of 0.42% per year.6

Income Taxes.

For taxable accounts, taxes can drastically reduce total return. At Sierra Wealth Advisors, our tax-managed strategies can significantly reduce taxes on your portfolio, leaving you with more wealth to continue growing. Our fees are also deductible by many of our clients, which effectively reduces our fees by an additional 30% for clients in the higher tax brackets.7

1. 1.John C. Bogle, Founder and Former Chairman, The Vanguard Group, Remarks to American Association of Individual Investors Philadelphia Chapter, May 2005 (http://www.vanguard.com/bogle_site/sp20050524.htm)
   

2. 2.Growth of $100,000 assumes a gross annual return of 10.6% minus total costs of investing, and is not a guarantee of future results.
   

3. 3.Advisory Fees in the Total Costs of Investing graph assume a $1,000,000 portfolio.
   

4. 4.The NAPFA Benchmarking Survey, Moss Adams LLP, 2006
   

5. 5.Russel Kinnel, Fund Fees Are Coming Down, Morningstar FundInvestor, May 2007 (http://news.morningstar.com/articlenet/article.aspx?id=194298)
   

6. 6.Jason Karceski et al, Portfolio Transactions Costs at U.S. Equity Mutual Funds, 2004
   

7. 7.Self-employed clients may be able to deduct fees related to certain areas of advice (e.g., retirement plans, business planning, etc.). For other clients, our fees may be deductible to the extent that they exceed 2% of adjusted gross income. Please consult with your tax advisor to determine if our fees would be deductible in your situation.