The Real Cost of Investment Management

The same fee from one advisor can be a BARGAIN while being EXCESSIVE with another. It all depends on the value provided. I prefer to provide upfront an estimated total dollar amount of fees. Not just my fee, but also the estimate of the investment fees (ETF or mutual fund expense ratios for example.) If it comes out of a client's pocket, they deserve to see it, and in dollars, not percentages. This process started when a prospect explained that although they weren't receiving tax planning, they appreciated the lower fees their current advisor was charging. Once I added up the advisory fees and fund expense ratios, the prospect turned pale. (1.25% advisory plus 1.1% expense ratios add up on a $2.5 million account, almost $60,000 a year!) Although not anywhere close to what the prospect was paying, my fees are definitely NOT cheap! However, after experiencing a year of my service and planning, clients see why the value dwarfs the fees.

"Let's muddy the waters to make it look deep." 👀 I recently reviewed a portfolio where the current advisor wasn't generating "alpha" but instead had created an alphabet soup of different complex investment products and strategies. When I read through all the fine print 🔬 I uncovered over 👉 $100,000 👈 of annual fees and commissions being charged to the client. 👇 Here was the alphabet soup I found all within the overall investment portfolio. A = A-shares with a 5.75% up front sales commission B = Business Development Corporation (BDC) with a 10% sales commission. C = C-shares with a 1% up front commission with a trail and internal operating expenses on the share class of this private fund of over 4%. D = Defined Risk Fund, an expensive actively managed mutual fund that was underperfoming it's benchmark that was overlayed with an options strategy H = Hedge Fund with a 2% annual management fee and a performance fee on top. Fund had underperformed the benchmark net of fees since inception. L = L-shares with a 4.25% sales load on another share class of a private fund. N = Non-traded REIT, there were multiple where the share prices and distributions have been cut and the liquidity provisions for withdrawing funds have been limited. P = P-shares, I had never even heard of these in all my years as an advisor, but after combing through the prospectus they had some sort of extended back end sales charge. S = Surrender charge, annuities aren't all bad but these had 10 year surrender periods and it was hard to figure out where these specific contracts fit in their plan. T = Third Party Money Managers, there were multiple managers using proprietary funds which brought the total costs when added on to the advisory fees of over 2% for these accounts. U = Unit Investment Trust, this was basically just an expensive version of an ETF that had a commission built into it. Ten years working in broker dealer world gave me a understanding of how a majority of these products work and I'm now working side by side with the client to help them with 🕸 untangling the portfolio. #investing #financialplanning #retirement

Fees are insidious because the quietly drain your wealth without you noticing. When I personally look at my own investments, I think, "hey, that's pretty good!", because all I can see is the green part. The red part is what could have been, but it's invisible. That's why it's important to be vigilant about the fees that are being charged to your investments. And those big red slices are why I'm always banging the drum of "low fee index funds". Whenever I post something like this I hear someone say "Stop fear mongering, no one is being charged 2%". Here's a little story in response. Last week someone reached out to me and asked if I could help identify the fees they were being charged. They sent me a statement for a brokerage account with about $20,000 in it. Here's what I found. The $20K split across NINETEEN different actively managed mutual funds. The weighted average of those expense ratios was 0.6%. Not HORRIBLE, but not great. But that's not the end. This individual investor was ALSO being charged a quarterly management fee. On an annual basis it added up to 1.38%. Add those together and you get total annual fees of 1.98%. (And don't get me started about the tax inefficiency and underperformance they can expect from the bevy of actively managed funds in a taxable account). The above story isn't a case of outlandish and unusual fraud. It's the status quo for many investors who stumble into a financial advisor's office who offers to manage their investments for them. And you can see by the chart how devastating (yet invisible to the investor) the fees can be. What do you? Learn to invest on your own. No one will care about your money as much as you. And if you do want to talk to an advisor, find an advice-only advisor who doesn't manage your investments for an annual fee. Rather they help you set up your investments and provide advice for a flat fee. p.s. This is why we started Nectarine! To connect investors with advice-only advisors. Link in bio! As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often. -Jeremy #fees #bogleheads #piechart #investments #money

Is your portfolio more complicated than necessary? I met with a prospective client this week whose current advisor has their IRA in a portfolio that includes the 22 funds shown in the image. In addition, they have two taxable accounts with this advisor that include another 24 funds. Overall, there are 46 unique funds being used across the 3 accounts and the advisor is charging a 1.5% AUM fee for the investment management. This might have seemed like a reasonable fee to them on the surface. There is a lot of perceived complexity, and it looks like it must take a lot of effort to research these funds and make sure an appropriate allocation to each fund is maintained. But here is the dirty, little secret… This portfolio can be recreated with just 3 funds that are rebalanced once per year: 48% Total US Stock Market 19% Total International Stock Market 33% Total Bond Market How do I know this? I analyzed the underlying asset exposures of the portfolio. Here is a breakdown of the process so you can do the same: First, go to Portfolio Visualizer and plug the ticker symbols and allocations into the “Backtest Portfolio” tool on the website. Then, scroll down to the “Exposures” tab and look at the “Asset Allocation” to determine the combined exposure to US Stocks, International Stocks, and Bonds. It's as simple as that. This is the process I used and I then plugged the asset allocations into index funds to compare how the 3-fund portfolio would have compared to the 22-fund portfolio. I was not at all surprised to see that the performance was almost identical. You can see the comparison in the backtest linked in the comments along with a picture of the comparison. But it’s hard to justify a 1.5% AUM investment management fee if you are only holding 3 funds. If you are currently paying someone to manage your portfolio, please go through the process mentioned above. You might be paying a hefty fee for perceived complexity and not actual value. Feel free to reach out if you need help with your analysis. #Investing #Engineers