Hidden Fees in Wealth Management

Summary:

You think you’re only paying 1.0%. That’s the AUM rate they quoted you. But this could significantly understate how much your big institution advisor or “Private Client Banker” is actually pocketing from your family. Here are the five most common ways big institutions turn your hard-earned money into their bottom-line profits and how to find them in your statement.

How much are additional fees costing you?

Why should you care about hidden fees? After all, it’s just parts of a percent right?

Here is an illustrative, hypothetical example of how much hidden fees on a $2.0M portfolio could be siphoning away:

• $5,000/yr at 0.25% in hidden costs
• $10,000/yr at 0.50%
• $15,000/yr at 0.75%

And keep in mind, this is on top of the 1.0% that is their base advisory fee. On $2.0M that’s $20,000 a year as the starting point before these additional fees. In the game of wealth management, small percentages add up quickly to big numbers.

Let’s get into what all these fees are and how you can find them.

Fee 1: 12b-1 Fees or Sales Kickbacks

A 12b-1 fee is a “marketing and distribution” charge attached to certain mutual funds. This typically runs 0.25% to 1.0% of your investment every year. The industry originally created these fees to cover the cost of promoting a fund to new investors. But if you ask us, it’s a bit strange to be charged a marketing fee every year for something you’ve already bought. In practice, this fee tends to be used as a kickback to the advisor or brokerage that sold you the fund. Not only does it cost you, but it creates perverse incentives for advisors to recommend the funds that pay them the most, not necessarily the ones that generate the returns most aligned to your goals.

To find it, pull up your fund’s prospectus or fact sheet and look for a line item labeled “12b-1 fee” in the fee table. It’s usually disclosed separately from the fund’s overall expense ratio, not folded into it.

Fee 2: Internal Platform or “Technology” Fees

This is a fee charged by the custodian holding your investments or the platforms used to service your account. This is separate from the service fee your advisor charges and separate from what your funds charge. The big advisors have lots of their own in-house platforms and these fees are simply for the privilege of using their “infrastructure.”

To find it, check your account statement for any line item that isn’t a fund expense or an advisory fee. That means anything labeled “platform,” “custodial,” or “admin” fee is worth a second look. If nothing on the statement is obvious, ask your advisor directly for an itemized breakdown of every fee assessed against the account over the past year. If they can’t produce one quickly, that’s a signal worth paying attention to on its own.

Fee 3: Trading or Brokerage Fees

These are charges assessed every time a trade happens in your account like buying or selling a stock, fund, or ETF. Most major brokerages have eliminated commissions on standard stock and ETF trades, but the firms with big trading desks can still make a spread on the difference between buying and selling less liquid products like bonds or derivatives across clients. An advisor who trades frequently, whether or not it’s in your best interest, can quickly rack up fees behind the scenes.

To find these, review your account’s trade confirmations or the transaction history section of your statement. Each trade should show any commission or fee charged alongside it. If you’re not sure what “frequent” trading looks like for your account type, ask your advisor directly how many trades were made in the past year and why. A reasonable answer should be easy to explain in a sentence or two without requiring a spreadsheet.

Fee 4: Expensive Funds and other Products

Not every fee shows up as an auditable line item. Sometimes the fee is baked into the product itself, like a high expense ratio for an ETF or mutual fund. Two funds tracking the same index can differ by ten times or more in what they cost you annually, with almost zero difference in what you actually own. Actively managed funds, in particular, often charge significantly more than a comparable passive alternative, without reliable evidence they outperform it after fees.

The big name firms often have their own “proprietary” versions of common strategies that have much higher fees than other providers. This is where the firm itself is making more off of your assets without needing the advisory part of the business explicitly charging you for it.

To find these kinds of fees, look up the fund’s expense ratio (a single percentage, usually listed right alongside the fund name on your statement) and compare it against a low-cost index fund tracking the same or a similar benchmark. If you’re paying more than the low-cost index version provided elsewhere, it’s worth understanding exactly what you’re getting for the difference.

Fee 5: Cash Sweeps

When cash sits uninvested in your accounts, it doesn’t just sit there. It gets automatically “swept” into a money market or bank sweep account the firm or brokerage chooses for you. They then earn interest on that cash at the prevailing market rate, but often pay you a fraction of it. For example, if money market funds are paying 4-5%, the firm you’re working with may be making that on your cash but pay you just 1-2%. That difference is pure profit for the brokerage, earned on money that’s technically yours.

Check your statement for the exact name of your “sweep” or “cash management” account and look up its current yield. Then compare it against a competitive money market fund at the same brokerage (most offer a better-paying alternative, they just don’t default you into it). If the gap is more than a percentage point or two, you’re leaving significant money on the table simply by not asking to be moved into the better option.

Want help figuring out how much you’re actually paying?

It is important to perform these types of audits with any advisor you work with. Transparency should be a requirement, not a preference. We believe investors should know exactly how much they are paying their advisor so they can make an informed decision on whether the value matches the costs.

If you’d like help figuring out how much you’re paying your financial advisor, feel free to reach out to me using my email below for a complimentary, Hidden Fees Audit.

Kangpan & Co. is a flat-fee, independent advisor. We do not charge commissions or hide any fees. What you see is what you get and we think the rest of the industry should do the same.

Nathan
Founder & Lead Advisor
[email protected]

Kangpan & Co. is a flat-fee financial advisory firm specializing in helping mid-career professionals navigate the career, family, and financial tradeoffs that come with this stage of life. This content is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed advisor for help with your individual situation. Employees and clients of Kangpan & Co. may hold positions discussed in our content. Past performance is no guarantee of future results.