When to Choose a Fee-Based Account for Your Retirement Savings

The decision depends on the level of the fee, what services are included, how often you trade and any hidden costs that may eat into your balance.

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Assets are flooding into investment accounts that charge clients a single asset-based fee rather than a commission on each trade. But regulators and consumer advocates warn that these accounts aren’t always the best choice for investors.

In a fee-based account, you pay a percentage of your account balance, often 1% or more, which will typically cover brokerage services and investment advice. While paying a single fee may seem attractive, the advantages of these accounts depend heavily on the level of the fee, what services are included, how often you trade—and any hidden costs that may eat into your account balance. At some major brokerages, for example, outside firms may execute trades for fee-based accounts, causing customers to pay commissions on top of their asset-based fee, according to the Securities and Exchange Commission.

Both the SEC and the Financial Industry Regulatory Authority have included fee-based accounts among their top examination priorities for 2018, saying they’ll be looking at whether brokers are making reasonable recommendations when switching clients to these accounts.

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Big brokerage firms are seeking to boost assets in their fee-based accounts because they generate more stable, predictable revenue than commission-based accounts. The U.S. Department of Labor’s fiduciary rule, which requires all financial professionals offering advice on retirement accounts to act in investors’ best interests, has helped to turbocharge the trend. The rule doesn’t prohibit commission accounts, but it requires firms to address the potential conflicts of interest that can arise in them—such as when brokers can earn a higher commission by recommending one product over another. Although key elements of the rule have been delayed until mid 2019, it has already had a significant impact on how financial-services firms conduct business.

Regulators and consumer advocates are concerned that some firms may be switching retirement savers into fee-based accounts wholesale, without assessing whether the move is right for the customer. Let’s say you have always kept your retirement savings in a commission-based account because you rarely trade. But your brokerage firm decides that all assets subject to the fiduciary rule should be in fee-based accounts. “Now I’m going to be charged 1% or 1.5% on an account I don’t do any trading in,” says Joseph Borg, director of the Alabama Securities Commission and president of the North American Securities Administrators Association. “It’s cheaper for me to do a transactional account.”

If your broker is pushing you toward a certain account type, remember that the choice is yours—even if getting the account you want means moving your money to a new firm. The vast majority of firms, however, continue to offer both commission- and fee-based accounts, says Barbara Roper, director of investor protection at the Consumer Federation of America.

Figuring Out the Best Fit for Your Retirement Savings

Fee-based accounts have their benefits. They can reduce the adviser’s incentive to recommend unnecessary trades or pricey products. Your interests are generally aligned with your adviser’s, because her compensation grows when your account grows.

Think about how often you trade and whether you need or want the investment advice or other services covered by the asset-based fee. The more you trade, the more money a fee-based account may save you. But if you intend to just buy and hold a target-date fund, which automatically adjusts your investment mix as you age, “you shouldn’t be paying ongoing fees,” Roper says, because you won’t be trading or making much use of the broker’s advice.

Consider the level of the fee and whether you’re willing to negotiate for a better deal. Some online “robo advisers,” such as Vanguard Personal Advisor Services and Betterment, charge 0.3% or less, a level that may make sense even for infrequent traders. Fees at big brokerage firms are often more than 1%, but those firms generally acknowledge that the fees are negotiable, Roper says, and the larger your account, the better your chances of haggling successfully for a lower fee.

Ask about any additional fees you might incur in addition to the asset-based charge. These might include administrative costs or fees for third-party services. Over the past couple of years, the SEC has brought cases against several large firms that used outside firms to execute trades for their fee-based accounts—a practice known as “trading away”—sticking customers with additional costs that weren’t adequately disclosed. Ask specifically whether the asset-based fee covers all of your trade execution costs, the SEC advised in a recent investor bulletin. Also ask how often the adviser will review whether the fee-based account is still appropriate for you. And before investing, check the adviser’s background and disciplinary history at adviserinfo.sec.gov.

Eleanor Laise
Senior Editor, Kiplinger's Retirement Report
Laise covers retirement issues ranging from income investing and pension plans to long-term care and estate planning. She joined Kiplinger in 2011 from the Wall Street Journal, where as a staff reporter she covered mutual funds, retirement plans and other personal finance topics. Laise was previously a senior writer at SmartMoney magazine. She started her journalism career at Bloomberg Personal Finance magazine and holds a BA in English from Columbia University.