In an ideal world, financial planners could work for free. In fact, in an ideal world, everything would be free. But that’s not practical or ever likely. After all, things cost money. And, like everyone else, financial planners have overheads.
But do you even need a financial planner? Couldn’t you sort out your own investments?
Let’s step back for a moment and think about that. Let’s use yachting as an example. In theory, the owner of the yacht could drive it himself or herself, but generally they prefer to leave it to professionals. After all, which scenario is likely to ensure an enjoyable and successful cruise?
So you could also manage your own investments, but do you have time or the expertise?
Let’s give you an idea of how a financial planner can help you.
Most investors have a collection of investments, but no clear idea where they want to get to financially. Or, if they do have goals, they don’t really know whether or not they are feasible.
A responsible financial planner will have a series of meetings with you, establish your financial goals and write a roadmap—including a financial analysis to see whether your goals are feasible. In subsequent meetings, they will review your roadmap, see if it needs altering, discuss the basics of long-term investing, investment opportunities in the 21st century and finally recommend some suitable investment vehicles, which they will spend a considerable time explaining to you in depth. This should include a clear explanation of the fees and structures of the investment vehicles involved.
If you follow the financial planners’ recommendations, they will help you complete your paperwork, ensure your investment structures and the underlying investments are functioning properly and review your investments and financial plan with you every six to 12 months to ensure that everything is aligned to your current lifestyle and goals.
As you can see this takes a lot of time and the financial planner has to be paid for this work somehow. Normally they don’t charge fees, but are paid via the life assurance and investment companies should you go ahead with their investment recommendations.
Many investment vehicles have similar charges, but one of the major causes of disappointment and anger by yacht crew and other investors is when they discover that they have inadvertently signed up for an investment that locks them in for 20-25 years, or sometimes even longer.
We’d strongly advise you never to sign up for an investment that has a maturity date longer than ten years. Also check on the availability of withdrawals during the time your money is invested. At Yachting Financial Solutions we never set up investments for longer than 10 years. Depending on client circumstances we may even set up investments for as short as five years.
The costs of investing
Investment charges aren’t always easy to understand. You’re not a financial expert, so it’s unlikely you’d even know what to ask or look for. If you are working with a good financial planner they will explain the fees to you clearly. But if you’re investing directly without the guidance of a financial planner, it’s sometimes difficult to know what fees are involved and what they cover.
To help you here’s a handy guide of the most common fees.
When someone invests money, there can be several fees involved, including:
Management fees are charged by investment managers or funds to cover their operational expenses and to compensate them for their services.
These fees typically range from 0.5% to 2% of the assets under management (AUM) and are paid on an ongoing basis, either quarterly or annually. Management fees are used to cover expenses such as salaries, rent, and marketing costs.
Transaction fees are fees charged by brokers when buying or selling securities, such as stocks, bonds, or mutual funds.
The amount of the fee varies depending on the broker and the type of security being traded, but it is usually a small percentage of the total transaction value.
For example, a broker may charge a fee of $5-$10 per trade for stock transactions. Some online brokers offer commission-free trading, but they may still charge other fees for services like account management or access to premium research.
Sales charges or loads
Sales charges, also known as loads, are fees charged when you purchase certain types of mutual funds or exchange-traded funds (ETFs). The fees can be either a front-end load (charged when you purchase the investment) or a back-end load (charged when you sell the investment).
Front-end loads are typically a percentage of the investment amount, ranging from 1% to 5%, while back-end loads typically decrease over time and may be waived if you hold the investment for a certain period of time.
Some mutual funds and ETFs do not charge sales charges and are known as “no-load” funds.
Redemption fees are fees charged by some mutual funds or ETFs when you sell your shares.
The fees are designed to discourage short-term trading and are typically higher for holdings that are sold soon after purchase. For example, a fund may charge a fee of 2% if you sell your shares within the first year of purchase, but reduce the fee to 1% if you hold the shares for two years.
Redemption fees are typically a percentage of the total redemption amount and may be deducted directly from the proceeds of the sale.
Some investment accounts, such as retirement accounts or brokerage accounts, may have annual or monthly maintenance fees to cover the cost of administering the account.
For example, a brokerage account may charge an annual fee of $50-$100, while a retirement account may charge a monthly fee of $5-$10.
Some investment firms may waive account fees for customers who meet certain criteria, such as maintaining a minimum account balance or making a certain number of trades per month.
Performance fees are fees charged by some investment managers based on the performance of the investment. For example, a hedge fund manager may charge a fee of 20% of the profits earned by the fund.
Performance fees incentivise the manager to generate high returns, but they also increase the overall cost of the investment and can reduce the net return for the investor.
Performance fees are typically charged on an annual basis and are calculated based on the performance of the investment over the previous year.
It’s important to carefully consider all of the fees involved when making an investment decision and balance them against potential investment performance, as the fees can have a significant impact on the overall return on your investment.
No investment is likely to have all of these fees. But at least you have an idea now what to look out for.
To get the best financially out of your yachting career, make sure you choose your financial planner very carefully.
- have they had a series of meetings with you and actioned the procedures as outlined above?
- are they interested in you and helping you achieve your financial goals?
If they have followed the steps above, then almost automatically your financial planner will have chosen financial vehicles based on your needs. If the financial planner does not follow these procedures, walk away. Remember the quickest and ostensibly cheapest are not necessarily the best.
However, do also bear in mind that this is long-term investing and a responsible financial planner can only work on the information you give them. If you substantially change track after a short period of time and want to cash in your investments, they can’t be responsible if your investments aren’t suitable for that. So be mindful of investing long term if you think you will be making major changes to your life during the term of the investment. The big one is leaving the yachting industry.
If the fees seem high, be clear what you are comparing them with and ask for a detailed explanation.
A good financial planner will always explain.
Having outlined the benefits of working with a financial planner in this article, forgive us a plug for our service in the shape of a couple of questions. How is your financial plan looking? Would you like some help with it?