The Seven-Figure Portfolio Fee

  • Thread starter David S. Meyers, CFP(R)
  • Start date

D

David S. Meyers, CFP(R)

Wall Street Journal recently published, in their WSJ.Money magazine, an article titled "The Seven-Figure Portfolio Fee". Here's a link to it:

<http://online.wsj.com/news/articles/SB10001424052702304250204579433392421114838>

The subtitle is "The cost of managing finances is coming down for many investors. But, for the wealthy, it's a different story.

They proceed to discuss just how much assets-under-management fees add up to for very and extremely wealthy clients, starting with a $5million portfolio (managed at 1% of assets), a $10million portfolio (at 0.50% of assets), a $50million portfolio (at 0.25% of assets), and a $100million portfolio (also at 0.25% of assets -- 0.25% seems to be the lowest tier to which most AUM-based advisors fees may reach, though when a client has that kind of money involved, of course, fees are certainly subject to negotiation!)

Anyway, the numbers are shocking (to anyone who hasn't done the math already). Over the course of 25 years, the $5million client will have paid $1,643,300 in fees (clearly they are including some kind of portfolio growth, since 25x$50,000 = $1.25million). Now, of course, that doesn't say anything about what that client got for all that money. At 1% of assets, the client was paying $50,000 each year -- again, that *is* a lot of money.

And it gets even worse -- per the article, "the typical American household is being charged 1 to 2 percent of its portfolio". 2%!

And if that paid for nothing but portfolio management, it's an astoundingly high amount of money. If all that client needed was someone to manage, say, a 60% stock, 40% bond portfolio in a cost effective and efficient manner, such a portfolio could be built out of index funds for about one tenth of that fee, and a portfolio manager putting together such an index-fund based portfolio should probably not charge more than 25-50 basis for it -- meaning that if it's just portfolio management and nothing else, that $5million client is probably paying somewhere between two and three times as much as he could be.

[More at <http://meyersmoney.wordpress.com/2014/04/11/the-seven-figure-portfolio-fee/>]

--David



--
David S. Meyers, CFP(R)
http://www.MeyersMoney.com
disclaimer: discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional.
 
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R

Ron Peterson

And it gets even worse -- per the article, "the typical American household is being charged 1 to 2 percent of its portfolio". 2%!
That probably covers transaction costs of buying and selling stock and options. Is there anyway to
get charged less than 1% on the account balance and still buy and sell stocks and bonds?

--
Ron


======================================= MODERATOR'S COMMENT:
[sorry for slow article approval]
 
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David

That probably covers transaction costs of buying and selling stock and
options. Is there anyway to
get charged less than 1% on the account balance and still buy and sell
stocks and bonds?
Plenty of ways.

Example 1: All assets in the account are invested in index funds with
management fees of 0.2% or less.

Example 2: Assets purchase securities directly -- commissions on equity
trades can be a small fraction of a percent (depending on size of
transactions). For example, buy $50,000 worth of one individual stock,
pay an $8 commission: cost is 0.016%.

Example 3: Something like FolioFN.com where you pay $290/yr for
unlimited, transaction-cost-free buys of pre-built "folios",
commission-free trades (using their "daily trading windows"), etc. On
a $100,000 portfolio, that's 0.29%/yr. On a $500,000 portfolio, it's
0.058%/yr.

And, bear in mind, in most assets-under-management arrangements, the
asset management fee is *in addition* to costs of underlying funds (and
often in addition to other transaction costs, too - if the advisor buys
ETFs for the client, the client may be paying both the ETF's expense
ratio, the commission, *and* the advisor's fee). So if the asset
manager puts the money into expensive actively managed funds with 1%
expense ratios and they charge their clients an additional 1%
management fee, the client is paying 2% before ever seeing a penny of a
return on their investment.




--
David S. Meyers, CFP®
http://www.MeyersMoney.com
Please note that all discussions in misc.invest.financial-plan are for
educational purposes only and should not be construed as financial
advice. For personal financial advice, please consult directly with a
professional. To find one near you, try <http://www.NAPFA.org> or
<http://www.LetsMakeAPlan.org>
 

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