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Lewis Braham: How Much Are You Paying For Your Portfolio?
Lewis Braham gets an Old_Skeet ata-boy award today for his article: "How Much Are You Paying for Your Portfolio?" For me, according to Moringstar's Instant Xray analysis I am paying 0.87%. That is a good bit less that the standard 1% wrap fee most advisors charge plus there are also the fees associated with the assets one might hold that come from the etf or fund company. With this, I'm thinking since I am for the most part a buy and hold investor, in A share mutual funds, I've got a good deal. In addition, should I wish to reallocate my weightings within my portfolio I am free to do nav exchanges form one fund to another fund within the same family of funds with no additional charges by the fund company and/or to my broker/advisor.
As Flo says ... on the Geico commericals ... "Feeling Pretty Good!"
I keep track of my ER on spreadsheet with respect to % allocation, overall ~0.40%. Large allocation to ETFs and index funds helps to keep it reasonable. For taxable account we switched to all index funds, ETFs, and individual stocks for tax efficiency purpose. It has been showed high ER poses considerable drag on the portfolio's total return. In certain asset classes actively managed funds including EM and international small caps still make sense while we prefer the cost effective options for large caps, domestic and developed markets.
Thank you. There was some text that had to be left out for space reasons. One thing was how there is a fee model I think that is more objective than either commission-based or fee-based advice. That is a retainer fee in which the client pays the financial planner a flat rate--a flat fee of x dollars for a specific service such as a financial plan or an annual/quarterly review. This separates the adviser's fees from the portfolio entirely so there are no commissions and no asset based fees. It is similar to a fee you might pay for instance to see an accountant and have them do your taxes. The issue with this is one of popularity as clients sometimes have sticker shock having to write a check to their adviser rather than letting the fees be automatically deducted from their account's assets. They may actually pay more with the asset based fee, but not looking at the fee somehow makes it easier for them to swallow. It's more transparent however to pay the flat fee and can lead to more comprehensive/holistic financial advice as opposed to just portfolio-centric investment advice.
Very good column. I like the observation that the commission model can work well for buy-and-hold investors.
Regarding the fee-based model ... Not only may advisors recommend keeping mortgages, but they may recommend getting a mortgage instead of using spare cash. Someone I know who had too much cash sitting in a Fidelity MMF got the suggestion (technically not "advice") from a Fidelity rep to finance the whole purchase of a vacation home rather than use the spare cash (earning 0%). Not even a suggestion to buy a CD through Fidelity. (Fidelity reps get some pay based on AUM and the type of investments.)
Even "free" advice comes with a price.
No matter what model of payment for services is used, there are always potential conflicts. Flat rate? The provider is motivated to provide a canned/template solution and expend little time or effort in personalizing the work (or getting to know you). Hourly rate? The provider has the opposite motivation - pad the timecard while producing the same product. AUM percentage? Reverse churn (let the money sit - after all, something like 94% of performance is due to asset allocation, so if we're looking at portfolio performance there's just so much value to be added anyway).
These potential conflicts exist with any service. IMHO the solution is to find someone trustworthy and focus less on the form of remuneration, because the ones only out for themselves will figure out how to maximize their gain regardless.
Comments
As Flo says ... on the Geico commericals ... "Feeling Pretty Good!"
Old_Skeet
Regarding the fee-based model ... Not only may advisors recommend keeping mortgages, but they may recommend getting a mortgage instead of using spare cash. Someone I know who had too much cash sitting in a Fidelity MMF got the suggestion (technically not "advice") from a Fidelity rep to finance the whole purchase of a vacation home rather than use the spare cash (earning 0%). Not even a suggestion to buy a CD through Fidelity. (Fidelity reps get some pay based on AUM and the type of investments.)
Even "free" advice comes with a price.
No matter what model of payment for services is used, there are always potential conflicts. Flat rate? The provider is motivated to provide a canned/template solution and expend little time or effort in personalizing the work (or getting to know you). Hourly rate? The provider has the opposite motivation - pad the timecard while producing the same product. AUM percentage? Reverse churn (let the money sit - after all, something like 94% of performance is due to asset allocation, so if we're looking at portfolio performance there's just so much value to be added anyway).
These potential conflicts exist with any service. IMHO the solution is to find someone trustworthy and focus less on the form of remuneration, because the ones only out for themselves will figure out how to maximize their gain regardless.