Life After Full-time Work Blog

Learn about preparing for life after full-time work through posts from Don's upcoming book.

#38 Unbundle The Fees

What do we pay for the privilege of asking someone else to manage our investments? This post lists many forms of payment.


Advice or any form of assistance with your post-work financial planning is useful. And so you should expect to pay for it.

A problem is that sometimes it may appear to be free because you are not billed explicitly for it. (And many buyers of services – that is, people like you – prefer it that way; they prefer not to think about it or to have to write a check for it.) Clearly, when you seek advice or assistance the main thing you’re looking for is the competence of the person or firm you hire. But among your search criteria should be that you get a clear understanding of how your professional (or, more generally, your professional’s firm) will be paid. And since there are multiple ways of remuneration, and payments for multiple services may be bundled into a single amount or formula, you should be aware of the unbundled (that is, separate) amounts of remuneration for the difference services. That’s the only way you can compare the charges for the services you’ll receive.

Payments to your professional’s firm tend to be of two main types. One is an explicit fee that you pay directly, of a size independent of the amount of assets under consideration. The other is a commission (or equivalent) paid by an investment manager to your professional’s firm, for directing your assets to that investment manager, typically explicitly tied to the amount of assets under consideration. (Sometimes your professional’s firm is itself the investment manager.) Confusingly, sometimes remuneration is called fee-based, giving the impression that it’s independent of asset size, when in fact it is based on asset size after all. And some forms of remuneration are a combination of fees and commission equivalents. So: buyer beware, and be aware.

The main forms of fee-only asset-independent remuneration that you might pay to your professional’s firm are as follows:

  • A one-time fee for a one-time service.
  • A flat retainer fee (for example, so much a quarter or a year) for services that will be ongoing.
  • An hourly fee for services that will be ongoing.

The main forms of asset-based (which I also refer to as commission-equivalent) remuneration paid by an investment institution or indirectly by you to your professional’s firm are as follows:

  • A front-end load. This is an amount paid at the start. Typically it means that the amount that will be invested for you is reduced by an amount related to the front-end load.
  • A back-end load. This is an alternative to the front-end load. Under this arrangement the payment is made to the professional’s firm at the start, and the full amount of your assets will be invested. But if you withdraw the investment before some specified period of time, there will be a form of surrender charge applied, to offset the up-front payment.
  • A trailer. Under this arrangement the professional’s firm is paid a (smaller) amount periodically (such as every month or quarter or year) as long as your investment stays in the fund into which it is initially placed.

As you will have guessed by now, some commission-type arrangements involve both a front-end or back-end load as well as a trailer.

Asset-based commission-type arrangements have been very popular with advisory firms. They’re virtually out of sight, if they’re taken directly out of the fund. Obviously they have an impact by reducing what would otherwise be the value of your assets, but if all you see is an end-of-year value of assets, you won’t see explicitly how much the value has been reduced because of the professional firm’s compensation. And many buyers of services – that is, people like you – are perverse, in the sense that they will live happily with a concealed asset-based commission but be appalled by a much smaller explicit fee.   This makes it much more convenient for a professional firm for remuneration to come from a commission; and since commissions vary from one kind of investment product to another, it is tempting to place your assets in a high-commission arrangement rather than a low-commission arrangement.

In some countries legislation has therefore been passed (for example, in the UK in 2013, in Australia in 2015) banning commission-type remuneration. And there may also be legislation that binds the professional to give advice that is solely based on what’s appropriate for you, unconflicted by remuneration arrangements. In the US, for example, the intention of the outgoing Obama administration was for a new fiduciary standard to come into force in 2017, requiring that the professional’s actions would be guided solely by what’s in your best interest.  (But my current understanding is that this intention has not yet taken effect.)

I don’t profess to be knowledgeable or up to date on legislation (in any post on this website); my sole purpose is to educate you so that you know how to think about these issues. And a good way to think about the issue of payment to professional firms is simply to be aware of how they are paid in dealing with you.

What has all of this to do with active and passive investing? The connection is that active investing is a much more expensive service to offer than passive investing, for the investment management company offering it in a mutual fund or unit trust or ETF. It is also typically more profitable, so the company pays higher commissions for active than for passive. The higher cost of active management may be in addition to the remuneration of your professional’s firm. If so, by the time your professional firm’s own fees are added, the total charge to you may be noticeably high. With legislation requiring a fiduciary standard of conduct and explicit fees, commentators predict that buyers of services (that is, people like you) will be more inclined to ask for passive management in order to reduce aggregate fees, or that professionals will be more inclined to place you in passive investment products for the same reason.

And so a natural question now is: how can you compare active and passive products? That’s the subject of the next post, to look at one angle on that issue.



It is reasonable to be charged for financial advice and assistance.  You pay for these services in many possible ways, some direct and some indirect. Only if you are aware of exactly what you are being charged can you compare the charges with what others might charge.


I have written about retirement planning before and some of that material also relates to topics or issues that are being discussed here. Where relevant I draw on material from three sources: The Retirement Plan Solution (co-authored with Bob Collie and Matt Smith, published by John Wiley & Sons, Inc., 2009), my foreword to Someday Rich (by Timothy Noonan and Matt Smith, also published by Wiley, 2012), and my occasional column The Art of Investment in the FT Money supplement of The Financial Times, published in the UK. I am grateful to the other authors and to The Financial Times for permission to use the material here.

6 Responses to “#38 Unbundle The Fees”

  1. Ted Harris says:

    Don, this topic is more financially important than many investors realize. For instance, would we willingly give up 1% per year compounded when we may not have to, for exactly the same investment mandate/strategy? Some institutions offer products in silos, that is they have different personnel selling and servicing different investment products and these people are not necessarily aware of, or encouraged to recommend, another “silo”. Fees can vary by “products” with exactly the same investment mandate. Here in Canada there are categories (“classes”) of mutual funds which offer different fees depending on the amount you have invested in the fund. “Pooled” funds (also unitized funds, similar to mutual finds) tend to be available for larger amounts of assets. (The historical minimum was $150,000.) Pooled funds have a tapered fee and the fees are tax deductible for non-registered money. On the other hand, mutual fund fees are taken off inside the fund and are not tax deductible.

    I deal with a few institutions. One advised me on the most cost effective way of implementing my investment strategy, while another put me into a flat fee mutual fund. In the latter case I had to take the initiative to move to tapered, tax deductible fees for the same mandate. This saved me $10,000 a year on a not-so-big investment. To compound the issue, I learned that the fund that I moved to, while it had the same mandate as the original fund, was managed by different people with a different historical performance record that was likely to yield up to another $10,000 a year !

    With regard to Obama’s initiative on fiduciary responsibility, it is my understanding that this is to be scrapped by the new administration. Interesting – you’d think that your advisor should be providing advice geared to your best interests.

    And finally, as it’s tax season, you mention that we often prefer not to see fees. By the same token we likely trust that our computer generated investment tax forms are accurate. Two years ago I was hit with a $60,000 capital gain on one such form. It didn’t happen and I had to argue with my representative until he realized that just because it was mechanically produced didn’t make it right. Head office revised my form – and those of many others.

    • Don Ezra says:

      Thanks so much for this comment. Your personal experience brings the issue to life so much better than my mere description of it. Thanks also for the final mention of your tax form — I had a similar experience last year and never questioned it. Now I will!

  2. Tom says:

    I am not an investment advisor, but I fully agree with your opening comment “Advice … is useful. And so you should expect to pay for it.” I have found however that many retail investors and institutional investors do not sufficiently value good, independent advice, and are reluctant to pay for it. They are, however, usually prepared to pay quite a bit for portfolio management services. Ironically, investors are likely to get far more value from a good, independent investment advisor (e.g. asset allocation advice and help in sticking to an asset allocation) than from an active portfolio manager. I generally believe markets are smart and efficient, but I have always found the markets for investment advice and portfolio management to be puzzling. I don’t know the answer, but your blog is helping to shed light on the issue.

    • Don Ezra says:

      Thanks very much, both for your comment and for the added insights from your observations.

      I think part of the explanation comes from a paper by a couple of psychologists, who say that some of us don’t want to think about some things, being risk avoiders and seeking (by not thinking about something) to avoid regret. (These people also buy insurance and take below-average investment risk.) I think an earlier stage of that thought process goes something like this: “I won’t think about it, so that I don’t need to gather information and make a decision on an obscure topic.” Analysis and decision-making consume mental energy, so in effect mental peace is secured at a financial cost. Perhaps I shouldn’t have called anyone perverse — they’re actually psychologically logical, even if financially perverse.

      I’m guessing, though, that my readers are actively curious rather than thought-avoiders.

  3. Ted Harris says:

    “Good” advice is worth paying for. People should understand why they are choosing an investment approach. Various aspects will enter the equation. Some may not be interested in stock selection while others may derive satisfaction from having their own portfolio of securities. The value of one’s portfolio may also limit one’s choices for third party management. I have seen sizeable portfolios invested in mutual funds because the likely surviving partner, who had interests in other equally demanding disciplines, would find them easier to understand, as they would asset mix. In my case, I hope to die with my faculties intact, but my Power of Attorney for Property includes broad, long range investment guidelines. I came from and care deeply about the investment industry, but I do not want to burden my successors with my preoccupations.

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