Articles
8 February 2012

Between the Lines

What to Know When Choosing an Advisor

by Jeff Bland

08 February 2012—

Investing can be a tricky process, which is why many turn to professional advisors for help before venturing into the investment world. While seeking the advice of a professional will help keep your investments on track, understanding what you’re being charged for can be a challenge. When you’re working with a financial advisor, ask yourself “Do I really know how much I am paying in fees?”
            If you buy a gallon of milk, there will be a clear and understandable cost. And as you walk away from the store with your milk, there are no additional costs—it’s an easy and simple task. Unfortunately, this is not the same way investments work. What you see isn’t always what you get. The cost associated with investments can be just one of at least three different costs charged to your account. Most financial advisors will provide a portfolio of funds, and with this service you will incur not one cost but three. By understanding these costs, you’ll ensure that you’re not paying for more than what you planned on. 
 
Three Costs to Know
1. The Advisor Fee
The advisor fee is generally expressed as a percent of the assets. While some financial advisors feel it is fair to use an average of 1.25 percent, some firms can be as high as 3 percent per year, according to a 2008 Rydex Advisor Benchmarking Research study. In addition to the advisor fee, you must pay for the funds your advisor recommends, and this is where you will find the two other costs: fixed and variable expenses.
 
2. Fixed Expenses
The fact is that every mutual fund and exchange-traded fund charges this fee, including even no-load funds. This fee is also known as the expense ratio. This pays for the operating costs of the fund (manager’s salary, research, etc). According to Morningstar, as of September 30, 2008, the average expense ratio for all mutual funds was 1.32 percent per year. However, it is not uncommon to find expense ratios as high as 6 percent.
 
3. Variable Cost or Trading Expenses
The variable cost or trading expenses does not refer to the commissions you might pay for your advisor to buy investments. When fund managers trade, they incur commissions, just like you or I would. The fund pays a lower commission rate; however, the number of shares traded can be in the millions—meaning the trade costs can be gigantic. This cost is not included in the annual expense ratio nor is it disclosed in the prospectus. To find these expenses, you must look in the funds Statement of Additional Information (SAI).
            In 2007, an analysis by researchers at Virginia Tech, the University of Virginia, and Boston College, found the average fund, based on a sample of 1,706 U.S. equity funds from 1995 to 2005, incurred an average annual trading expense of 1.44 percent per year during that period. Keep in mind this is in addition to your advisor fee and the fund expense ratio.
 
Worth the Costs?
After all of these costs are weighed, I still recommend using an investment advisor. However, you should be informed of what is being charged. One simple way to empower yourself is by looking your advisor in the eyes and asking, “What are the total costs I will incur by working with you?” Ask the advisor to give you a simple breakdown, including an advisor fee, fund expense ratio and fund trading costs.  
 
Jeff Bland is the president of Burrus Institutional Wealth Services. He can be reached at 801-532-0505 or jbland@burrusfinancial.com. For more information, visit www.Burrus.biz.
 
 
Business Trends
Back to School
Professionals Seek Education in Economic Crisis
 
Today the pink slip, tomorrow the diploma. As the economic crunch causes more companies to layoff, downsize or reduce hours, Utah’s labor pool is churning. Workers, mid-level managers and even executives are fighting to keep their heads above water. As a result, more Utahns are grabbing what they hope will be a lifeline and are heading back to school.
            Some are going back to earn vocational certificates, others are dusting off half-finished baccalaureate degrees or deciding to bolster their resumes with master’s or doctorate distinctions.
            If you’re one of those considering returning to school, you’ll be in lots of good company. The Utah System of Higher Education, which represents nine of Utah’s public colleges and universities, saw a 7.42 percent jump in enrollment for Spring 2009 semester over Spring 2008. The colleges experienced a similar increase in Fall 2008 and anticipate a consistent growth trend in the next year. And Utah College of Applied Technology schools are also seeing skyrocketing numbers. Enrollments at the Ogden Weber and Davis Applied Technology Colleges have increased more than 20 percent over the previous year.
 
Education Surge
University and college presidents state-wide can verify the statistics—they are indeed experiencing a marked uptick in enrollment. Ann Milner, president of Weber State University, says, “We’re seeing more students return to the university campuses, seeking to build on their skills and prepare for the changes in this economic climate. I think that is typical of a downturn in the economy. When things are good people think, ‘I’m doing OK where I am.’ When it gets tighter they realize in order to be able to compete in the future, they need to make sure they have prepared themselves educationally.”
            Because Weber is both a community college and university, its educational accessibility is popular with returning professionals. There, students can seamlessly move from associate’s degrees to bachelor’s degrees and even on to master’s programs. Accordingly, Milner says, Weber is seeing growth in both its undergraduate and graduate programs, particularly in the fields of business, health care, education and applied sciences.
            Michael T. Benson, president of Southern Utah University, says, “Just like every campus, we are experiencing an increase in enrollment. We’re getting some [professionals] that have been laid off or have been asked to be retrained in short intensive areas.” In addition to an on-campus surge in enrollment in the fields of finance, accounting, nursing and education, SUU is meeting the needs of more professionals online. The school has added innovative programs, such as its master’s in sports conditioning, which can be earned entirely over the Internet. “The sports conditioning degree is the only one of its kind in the state. With this program, public school teachers who don’t have the luxury of stepping out as full-time students can still get a degree and put themselves in a position for increased pay and responsibility in the schools where they’re teaching,” says Benson.
            The University of Utah has also seen enrollment increases in its professional schools, including law, business, pharmacy and education. While University of Utah President Michael K. Young says it’s too early to tell exactly how many students are returning professionals versus continuing college graduates, he estimates many are people who have been in the workforce for a while and are coming back to add to their credentials.
            He noted the most significant increase is in the University of Utah’s law school—a 28 percent increase in applications over last year—which is bucking otherwise flat or declining law school trends nationwide. “It’s an exciting time to come to our law school. It’s led by a great dean, and the interdisciplinary approach, the practical training, the international work—it’s all perfectly suited for the times. We remain, for the quality of the education, an extraordinary bargain,” says Young.
            A good portion of the students at Utah’s applied technology schools are those with high school diplomas who now want professional certificates to remain competitive. “I’ve been with applied technology colleges for 34 years, and this last year’s increases are unparalleled. We’re being bombarded,” says Michael Bowhuis, Davis Applied Technology College campus president. But that’s not all. Bowhuis estimates a good 10 to 15 percent of the students are professionals who have bachelor’s degrees and are looking to add practical skills to that university diploma.
            Ogden Weber Applied Technology College is seeing similar trends. “We do have a fair number of ‘reverse transfers,’ individuals with bachelor’s degrees who are looking for some hands-on skills. For example, someone with a finance degree may want to complete a media design program or earn IT network certification and broaden their skill base,” says James Taggart, OWATC vice president for instructional services.
 
More for Less
Milner points out the upsurge in student enrollment will only bode well for the state, “This is important for economic growth in the future. Really Utah’s most precious resource is a talented workforce.”
            Great news. But the bad news? Budgets have been cut for Utah’s public universities and colleges. “The tighter budgets affect all of us,” says Benson. “Like our peer institutions, we’ve had a pretty significant increase in student enrollment with fewer resources to try and educate those students. So we’ve tried to do some things: add to some of our faculty workload, increase our class sizes and in some instances not offer quite as many courses as we have in the past. But like I tell my faculty, this institution was founded by some hardy pioneers who came here in 1890. They survived, and we can too.”
            Belts have been tightened at UCAT schools, as well. “We are certainly doing an awful lot more with an awful lot less. Our budget was cut 8 percent this year, and we have another larger cut coming next year. We’ve tried to minimize the impact to our instructional programs, but we have had to reduce some programs with lower enrollment and even close programs where there has been the lowest enrollment,” says Taggart.
            Many schools say they are doing whatever they can to make ends meet—including moderate tuition increases—because they are anxious to maintain as many programs as possible until the economy rebounds. As for state support, USHE Commissioner William Sederburg said in a recent statement, “We are working closely with the Governor, his staff and lawmakers to ensure the state’s continuing investment in our institutions.”
 
Sink or Swim
So if you find yourself in a “sink or swim” crisis, you might want to follow the advice of SUU’s Benson, who says, “I told my students, there’s no better investment you can make in yourself than in the form of additional training and education. There are a few things you can go in debt for—the one I’d recommend is student loans. That’s something that pays back in spades. With the job market the way it is, if you get a low interest loan and get more letters behind your name, you’ll be that much better off when things trend upward, which they will.”
 


Built by Crowell