Question: Hi there, I’ve been looking at fees lately and am considering my options. Paying fees for both mutual funds and for a financial advisor adds up quickly. We’re currently paying over 3% a year of our portfolio for fees alone. What do you consider a reasonable fee for an advisor? Is it customary for them to charge a straight percentage of the portfolio for management, or is a set “per hour” fee more the norm? This didn’t used to seem like such a big deal, but now that our account is close to 200K, it seems like we’re paying our advisor an awful lot for the work that we’re getting in return. I appreciate your thoughts. Thanks, Doug (I’m currently living and working in Nepal.)
Answer: You’re right to focus on fees. Fees compound over time and they are a drag on returns. Here’s one way of looking at it: Over time most of us will earn something close to market returns on our portfolios–minus the fees.
Take this example from the Congressional Research Service. It looked at U.S. stock and bond markets returns over an 80-year period, from 1926 through 2005. Their model had a couple earning the median income and contributing 6% of family earnings each year for 30 years into a 401(k) account. They then used the market history from 1926 through 2005 with the portfolio invested two-thirds in stocks and one-third in bonds. The savers could expect to accumulate $356,434 (in inflation adjusted dollars) if the 401(k) expenses were equal to 0.4% of plan assets. But if the annual expenses were equal to 2% of plan assets, the couple would face retirement with only $263,663–or 26% less. Ouch!
Fact is, a total cost of 3% is in the high range. Take “wrap” accounts. This is when a broker hires a professional money manager to select and manage a diversified portfolio for you. All the charges–from brokerage commissions to advisory fees–are “wrapped” into one overall fee. The total cost of a wrap account generally ranges from 1.75% to 2.5% a year. Similarly, the fee figures I have seen for money managers that invest in a portfolios of mutual funds for their clients are the in the 1% to 2% range. That’s why I think 3% is high.
Fact is, in today’s world you should be able to get a good financial advisor for a total cost of about 1%. I am a big believer in DIY money management–do it yourself. But at the moment you are living overseas and it’s probably convenient to have a professional oversee your money. I don’t know when you’ll get back to the States. But when you do (or if you have the time in Nepal) I would definitely look for a professional advisor that charges a lot less a total cost of 3%. (After all, one thing that professional money managers should be able to do for you is drive down the cost of owning funds. By definition, that’s a real boost to your return.) Personal recommendations from colleagues and friends you respect is always a good way to start researching alternatives. You can investigate fee-only certified financial planners through two websites, the National Association of Personal Financial Advisors and the Financial Planning Association. A number of the major mutual fund companies will also manage a portfolio for you for much less than 3%.
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