UNDERSTANDING FEES

“A new junior associate was being shown around the waterfront by a senior broker. The broker pointed to the right, and he said there are our yachts, and over on the left you can see our banker’s yachts. The naïve junior associate turned to his new boss, and sheepishly asked, ‘where are the customers’ yachts?”

Fees are the driving force in the business, yet they’re rarely discussed with clients. This is a mistake in any business, but it’s particularly vexing in the money management business where so much emphasis is placed on account performance.

The key characteristics of fees are that they should:

1) Be Straightforward
2) Be Reasonable
3) Put the money manager and client on the same side of the table.

Our approach to fees is really quite simple and we believe it meets the litmus test of the three characteristics above. We charge our clients a fee quarterly based on a percentage of the assets under management. In other words, our fee is simply determined by multiplying the percentage fee by the assets under management at quarter end.

We have purposefully designed our fee schedule to be at the low end of the fee spectrum based on where competitors have structured their fees (Click here to have a ZIMCO fee schedule e-mailed to you). In addition, and this is of critical importance, we have designed our fees with a low minimum fee so that our services are affordable to more than just the very wealthy.

Unlike some other financial relationships where loaded mutual funds or annuities are used and high sales charges are levied at the start of the relationship, we think the structure of our compensation incents behavior that is in the best interest of our clients. For example, the fact that we get paid on an ongoing basis encourages strong client service as well as encourages us to grow our clients' assets consistently over time because the more money we make for clients the greater our compensation.

The following table should help illuminate the potentially harmful effects that even yearly above-average fees can have on a client’s net worth over the long term. The key thing to remember is that compound growth of money can cut both ways. It can be wildly beneficial when it’s in your favor, but have a tremendous drag in the accumulation of wealth when the cost of management is compounded at unfavorably high rates, i.e., high fees.

In the table, we have illustrated three different fee schedules for a $500,000 portfolio, and the difference in terms of lost wealth accumulation versus our fee schedule (9/10ths of 1 percent on a $500,000 portfolio) over ten, twenty and thirty years. The most expensive fee schedule we used was 2 percent, which is what a client would most likely see within a brokerage “wrap program”, followed by 1.5 percent, which many large financial services companies are charging for one million dollar portfolios and below.  Lastly, we used 1 percent, which is approximately the internal fee that a lot of equity mutual funds charge.  The results speak for themselves as you can see the loss of wealth accumulation for clients over time especially at the higher fee levels.

The table shows how costly high fees can be to a client’s bottom line:

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