Investment Fees

[Janitor Bob]

Off the topic of taxation and more on the side of personal finance.  A client is being charged 1.35% of her asset market value as an annual management fee...Does this seem high, low, average?

[RitaB]

If she can handle doing it herself, she can save some money:

http://money.usnews.com/money/personal-finance/investing/articles/2010/06/03/mutual-fund-fees-how-much-is-too-much-to-pay

Vanguard Total Stock Market Index expense ratio is 0.18%.  That fund attempts to mimic the entire stock market.  If she really needs a financial person's help, 1.35% sounds high according to this article:

http://money.usnews.com/money/personal-finance/investing/articles/2010/06/03/mutual-fund-fees-how-much-is-too-much-to-pay

[Lion EA]

Wow.  I have people paying 2% and 2.5% on smallish accounts.  My big investors are paying much less.  I need to do some reading before next tax season so I can check management statements as they come in.  Although, my client who's paying the most has huge returns all the time and has for years even when all my other clients had losses, so her manager is probably worth his fee.

[Margaret CPA in OH]

I have a client managed by Merrill Lynch advisor paying 1%.  The advisor is, in my opinion, doing a lousy job of actively managing the portfolio, however.

I have 6 clients with portfolios managed actively by a local advisor who charges 1% for up to $1,000,000 in value, 0.75% for $1,000,001-$5,000,000 and 0.5% for over $5,000,000.

Another client with a different local advisor is charged 1% and with a portfolio held with USBank pays a graduated fee like the one above.  Both of these are actively managed.

This is, of course, different from whatever internal mutual fund fees may charge. It isn't clear if your client's advisor is charging this over and above the internal mutual fund fees and is not actively managing the portfolio.  Nonetheless, in my opinion, this seems high. Perhaps it's time for the client to interview a few other advisors.  Then again, what has been the total return on this portfolio?  Sometimes higher fees result in better performance. 

[RitaB]

Hey, sorry, I posted the same article twice up there.  The second article is here:

http://www.wsj.com/articles/its-time-to-end-financial-advisers-1-fees-1421545038

 

[jklcpa]

It sounds a little high to me too. My clients that have actively managed portfolios with an advisor are paying right around 1%.

[Abby Normal]

They should be able to get 1% or less. I have clients paying 0.85%.

[SaraEA]

"Although, my client who's paying the most has huge returns all the time and has for years even when all my other clients had losses, so her manager is probably worth his fee."  RED FLAG!!!  Is her manager Bernie Madoff?  The same thing has happened in lesser firms--fake statements showing gains, year after year.  It's probably not your job, but someone has to look into this.

[RitaB]

I would add that almost everyone has had big gains since March 9, 2009.  Energy funds have gone down for about a year, but about everything else has done very well for the past six years.  We have been in the third longest bull market in history.  Yes, we heard the record scratch sound in August, but a pineapple could have successfully managed funds during the past six years.

http://money.cnn.com/2015/08/25/investing/stocks-market-in-5-simple-charts/

http://money.cnn.com/2015/05/06/investing/stocks-market-3rd-longest-us-bull-market/

[Lion EA]

Her money manager is a family friend of her son, which doesn't necessarily mean much.  But, her statements show publically-traded stocks that do show typical selling prices for the ones I know or notice.  And, it's a tight-knit Jewish community, so I'm not going to try to butt in when I don't suspect anything and know her son watches over her account.  She's been making great money for 25-50 years and more.  It's her only income.  Raised a son, bought a home in Fairfield County, donates to musical charities, travels, lives a good life, pays her taxes, covers her increasing medical expenses in her old age, etc.  Her son was paying per trade at a discount brokerage, but moved over to his friend and pays percentage of his assets now.

[RitaB]

  She's been making great money for 25-50 years and more.

Well, that's definitely more than six years, so good for her.  I think they say that the stock market has historically gained about10% a year, on average.  Of course, we all know what that means:  not much to an individual.  Maybe nobody got 10%. 

[Jack from Ohio]

Sage advice:

"Do not treat long term investments with short term thinking."

Not following this caused the 2007-2008 stock market crash.  Wise investors held their course.

We held the course, made no changes to this very day in our investment strategies, and have reaped great earnings.

[MsTabbyKats]

It depends on the results he's getting.  I'd rather pay 2% for "great results within the market" than 1% for average results.

[ETax847]

Depends on the level of service being offered.  I work as a financial advisor, and some advisors charge more because they do more than just manage money.  Don't be so quick to jump to conclusions based on the fee itself

[jklcpa]

Depends on the level of service being offered.  I work as a financial advisor, and some advisors charge more because they do more than just manage money.  Don't be so quick to jump to conclusions based on the fee itself

Since that is the area you work in, would you mind elaborating on those services that might be included and warrant a higher fee?

[Roberts]

additional services could be tax prep, trustee fees, the fee may include other accounts not being charged at all (Charitable trust), they may have foreign accounts with additional paperwork, there may be concierge services for the family including some legal representation included in the fee. There may be direct ownership of real estate management fees included as asset fees. The client may have chosen a day trading type service. Every firm offers a different variety of services.

The flat fee versus paying individually per hour or per trade as a commission isn't an easy answer. A local journalist declared that any financial professional charging a commission was a suspect for over charging - horrible thought process IMO. Paying $500 to buy $40,000 of Exxon Mobil to own the next 40 years isn't a bad choice if they are providing you services. Paying .5% per year to own a 20 year bond?

It's also easy to declare that anyone can do it on their own. The same could be said about tax preparation. We all know that's not the reality.

 

Edited September 30, 2015 by Roberts

[JohnH]

Off the topic of taxation and more on the side of personal finance.  A client is being charged 1.35% of her asset market value as an annual management fee...Does this seem high, low, average?

I think it's a ridiculously high fee.

(And I can almost guarantee you she is paying more than 1.35% when you add in the hidden costs)

But she might think he's worth it. 

After all, he drives a nice car, wears expensive suits, has a flashy office. 

Those things cost money, you know.

I suggest you print this off and give it to her.  http://johncbogle.com/speeches/JCB_AZ_Republic_3-00.pdf

If she can understand plain English, it will help her make the right decision.

Edited September 30, 2015 by JohnH

[JohnH]

This thread struck a nerve with me since I have seen several clients being taken to the cleaners by brokerage houses with excessive fees.  And I just learned over this past weekend about one trusted "advisor" who deservedly went to prison after stealing most of the lifetime savings of a widow I know.  I have given copies of the Bogle speech referenced in the previous post to many people.  Unfortunately most won't take the time to understand the very basic principles he explains.  But I keep trying.

Below is one of the most important sections of the speech. And to prove that Bogle hits the nail on the head, look at how uninformed and mathematically challenged financial advisors constantly rage against total market index investing in a low cost fund.  Try as hard as they wish, they ALWAYS fall victim to the inevitable, persistent truth of simple mathematical certainty. Facts are a stubborn thing. 

"There are lots of croupiers in the stock market casino. Fund managers and operators; salesmen who sell fund shares; investment brokers who execute fund portfolio transactions. Even the Federal Government finds itself among the croupiers, for fund portfolio turnover generates realized capital gains, and therefore taxes. Given all of these subtractions from the market’s return, the good plan relies on this surprising, if obvious, rule for measuring investment success. The central task of investing is to realize the highest possible portion of the annual rate of return earned in the financial asset class in which you invest—recognizing, and accepting, that that portion will be less than 100%.

Let me explain. It is simply a mathematical impossibility—a definitional contradiction—for all investors as a group to reach 100% of the stock market’s annual return. Yes, it is possible to select funds that succeed in earning, say, 105% of the market’s annual return. But the odds against doing so are about 25 to one as I noted earlier. Further, history also tells us that the probable outcome is that the average fund will earn only about 80% of the market return. If this is iconoclasm, so be it. But fund shareholders as a group face just such a shortfall, and recognizing that fact is the first step toward developing a good plan for equity investing.

There is an optimal—and obvious—way to closely approach the 100% target: Simply own the market. It is easy. An all-stock-market index fund, in substance, owns shares in every publicly-held business in America, and holds it for as long as the business exists. By slashing the croupiers’ take, such ownership is available at extremely low cost: No advisory fee; no sales charges; virtually no portfolio turnover and therefore nominal transaction costs, few realized gains, and minimal taxes. The all-market index fund is the croupier’s dark nightmare, and the investor’s bright dream. The simplest of all approaches to equity investing, then, is to invest solely in the shares of a single all-market equity index fund—just one fund. It is a good plan. And it works, regularly producing more than 98% of the market’s pre-tax return."

Edited October 1, 2015 by JohnH

[SaraEA]

I am a big fan of Bogle, and am no big fan of money managers--particularly the ones who work with big banks.  Yet Bogle's advice quoted by John simply isn't for everyone.  For example, an elderly person who has comfortable retirement income perhaps shouldn't be in the stock market at all.  Why take any risk to potentially grow your funds (or lose them) when you don't need to?  Others can't stomach the ups and downs of the market and will not sleep at night if they are in a total market index (especially lately).  A good money manager will help people sort these facts out and put them in investments appropriate for their needs and temperaments.  There is no one size fits all, and that's why some folks need financial advice.  And, yes, they have to pay for it.

Janitor Bob might tell his client to question the manager about the high fees, mentioning that her tax advisor noticed it.  I've done this several times when I spotted really high fees or excessive trading.  In almost every case the manager called me, made all kinds of excuses for themselves, praised me for working in our mutual client's best interests and for my brilliant insights, and cut out the crap after that.  Sometimes all they need to know is that someone is looking over their shoulder. Worth a try.

[JohnH]

Sara makes some great points, but I still contend that a financial advisor has a built-in conflict of interest which is impossible to overcome.  The portion of the speech I quoted addresses only the portion of one's investments allocated to equities.  But in his opening remarks in the same speech, John Bogle first addresses Asset Allocation.  Until one has a firm grasp on their asset allocation and why they got there, they should not commit one cent to equities.  Every inestor should be able to tell you their Asset Allocation off the top of their head. (at age 68 mine is 25% equities / 75% fixed income. I can explain exactly why that is so, and why & when it will change as I age)

Again, here is what Bogle says:

"The good plan relies primarily on a straightforward and conventional balance between stocks and bonds. How much in each category? As ever, your investment balance must depend largely on your own needs and circumstances. Typically, the allocation might range from something as crude as, say, 50% in stocks and 50% in bonds for older, moderately risk-averse investors who have accumulated substantial capital, have reached normal retirement age, and need to draw down income. Or up to 100% stocks for young, confident investors who are just beginning to accumulate their first investments in a 401(k) retirement plan, and have scores of years before income will be an issue. In short, intelligent asset allocation is an inevitably imperfect combination of (1) the years you have remaining to accumulate wealth, (2) the amount of your assets, (3) the income you require, and (4) the courage to stay the course you have set for yourself. In an uncertain world—and it will be ever thus—getting your allocation almost right is better than getting it precisely wrong."

(In other places, Bogle has elaborated on the Asset Allocation in more detail, and he makes a very good  case for Age-in-Bonds as a good default, even for ultra-conservative investors)

So the average investor really only has one major decision to make - What is the appropriate asset allocation that allows me to sleep well at night?  Afterr that, the entire investment scheme can be put virtually on auto-pillot.  Periodically rebalancing the equity portion into and out of a low-cost total market index will provide a guaranteed return equal to the entire US market (up or down), minus a very small expense ratio.  It is very simple, but far from simplistic.   

[SaraEA]

"So the average investor really only has one major decision to make - What is the appropriate asset allocation that allows me to sleep well at night?"  But understand that the "average" investor doesn't know that.  They sometimes need a financial advisor to explain it to them.  After that, they can just go into a target fund, where the investment mix changes with age (and they can choose one for an older age than they are if they want less risk).  Lately even target funds have been losing money, so an older investor might be better off with a fixed annuity.  Again, FAs fill a need and have a place.  One extra service we can give our clients is to alert them to excessive fees and trading and let them confront their FA.

[JohnH]

Yes, I recognize that there are plenty of people who spend their entire lives working very hard at their profession, saving responsibly, and accumulating enough to help fund a comfortable retirement.  Yet they won't invest the time and effort along the way to learn some very basic principles regarding how to manage it efficiently.  They will gladly turn over that task to someone whom they perceive as working in their interest, with hardly a second thought to the inherent conflict of interest in the arrangement.

They will take that person's recommendations without question, relying upon his/her smooth talk, nice suits, fancy car, impressive office, and confusing quarterly reports as their own basis for sleeping well at night. "It's all so complicated", they say.

They will also spend 10 -20-30 retirement years never knowing of the $3,000 - $10,000 per year of additional retirement income they have foregone to fund those benefits for the F/A. But I do agree that outcome is far superior to throwing darts at a board to decide how to manage one's retirement. 

Edited October 3, 2015 by JohnH

[JohnH]

I let the clock run out before I finished my last edit, but I decided to finish the thought and then I'll shut up about it. 

I do see one significant service F/A's provide.  By switching their clients in and out of the latest gimmick in mutual funds, or chasing that "can't lose" stock trading strategy, they help in setting prices while raking off their fees, commissions, and kickbacks. (Their clients, of course, bear the losses in both depletion of capital and excessive trading costs, but that's another story).  However, their churning activity helps keep pricing honest and so true indexers can rely upon the efficient markets to know their low-cost, tax-efficient index funds are priced correctly.

 For that reason, I appreciate the service F/A's provide at virtually no direct cost to those of us who actually do consistently benefit from their activities. 

Edited October 3, 2015 by JohnH