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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