The Securities and Exchange Commission has warned investors to “do the math” on subscription fees—a monthly charge that an increasing number of advisors are using with clients with less to invest.
Directed primarily at robo-advisors, but applicable to the growing cadre of advisors who use monthly charges to make investment advice more affordable for younger investors and those with lower account balances, the investor alert from the SEC’s Office of Investor Education and Advocacy (sec.gov/oiea/investor-alerts-and-bulletins/subscription-based-advisory-fees-investor-bulletin) warned that even a subscription of $3 to $10 might “appear inexpensive,” but it can “quickly eat up an account balance over time.”
For accounts with lower balances, “small monthly fees like these can add up to a large percentage of the amount invested and can end up being more expensive than traditional asset-based fees,” the agency warned.
Even an investor shelling out a $3 subscription fee would end up paying $36 for the year, or 7% of the value of a $500 account, the SEC said.
Such charges “could make it impossible to earn more from investments than the fees charged. This is true particularly as time compounds the effects of the fees on your account. In other words, as fees lower your account balance, they become a larger percentage of your remaining money,” the SEC warned.
The agency said that before investors sign up for advice they should “do the math” and calculate how much that fee will cost when compared with a traditional asset-based fee.
“Does this fee structure make sense for the current, or anticipated, size of your account? For example, if you plan to regularly add money to your account, the fee may be more affordable than if you are relying on investment growth to increase the size of your account,” the SEC said.
The agency also reminded investors that switching to an asset-based advisory account may not be easy because many advisors “require a higher minimum balance.”
Investors should also understand what services and advice they’ll get for their subscription fee and whether the services are important to them.
“Will the advisor monitor your account and check in with you? How often will the advisor update its investment advice? Is there a person you can communicate with about the services you will receive and/or the fees you will be charged?” the regulator asked.
Investors should also read the fine print on advisory contracts before signing up to see what canceling such an account might entail and whether their investments can be transferred to an account not managed by the advisor, or to another broker-dealer entirely.
“Some advisors only offer proprietary investment products. Cancellation may require the sale of some (or all) of the investments held in your account,” the SEC said.