Budget (account for) Adviser Fees

[savory]

Hi,

Could not find an answer to this question on past posts. Do you budget or account for mutual fund or adviser fees as part of your annual spending?

When I reviewed a few of the typical budgeted items lists, these fees do not seem to be included. Just trying to figure out if I am missing something or capturing it in total returns works just as well.

Thanks

 

[Aerides]

Typical budget lists here on the forum will not include advisor fees... as most here don't pay advisors, and self-manage for the most part.

If you have them, I would include them in expenses.

 

[savory]

Typical budget lists here on the forum will not include advisor fees... as most here don't pay advisors, and self-manage for the most part.

If you have them, I would include them in expenses.

My question partially came from an earlier post where an OP was discussing the "no-fee" investment his bank was claiming. The bank called it expenses and not fees. The OP rightly argued, IMO, it was a fee.

We all get charged on mutual fund fees and/or adviser fees. Some of us might get charged for both. I appreciate the response but still do not understand why the adviser and fund manager are viewed differently when calculated for our expenses?

 

[braumeister]

I suspect most simply use the total return approach.

I take note of the expenses in my funds (don't use an adviser), but I don't account for them as a line item in my spreadsheet. Rather, I just look at the total return and as long as I'm happy with that it's all good.

 

[gerntz]

Seems advisor fee is separate from expenses of investment to me. But since I don't formally budget, it's same out-of-pocket either way.

 

[Al in Ohio]

My excel spreadsheet lists the expense ratio for each fund and averages the expense ratio for my entire portfolio (weighted ave). I can then easily see immediately how much I can lower it by exchanging from higher cost funds to lower, plus mult the ave by the account bslance to relate my total annual fees.

 

[brett]

We don't. They net out of our bottom line returns. We judge our investment performance and our advisor on the bottom line, net net as it were.

 

[OldShooter]

If you write a separate check to the advisor then you probably want to include it in your expense projection.

As others have said, though, if the fee is simply deducted from your portfolio then it is most easily considered as a reduction in yield just as the internal mutual fund fees are reductions in yield. For example, if you have an advisor with a 1% wrap fee who uses actively managed equity funds and you project the nominal future stock market yield to be 8%, then you will probably get about 5% net after investment costs. So use that number for your projections.

 

[Bir48die]

Typical budget lists here on the forum will not include advisor fees... as most here don't pay advisors, and self-manage for the most part.

If you have them, I would include them in expenses.

I appreciate that many here in the forum are "self managed". However, I have my portfolio managed for me for a variety of reasons, one of which is not being all consumed on a daily basis with the status of my investments. I have a significant financial background and could take on this task if desired. When there are discussions about managers many times the posters will comments from the forum.

Now in many ways I am in agreement about financial advisers who take a large cut (I had one early on for a brief time). On the other hand selected money managers can be extremely effective and affordable.

Just wanted to comment because each has their own opinion on how they want to handle their finances and there is more than one way to accomplish that affordably.

 

[jonat]

I pay an advisor and do budget for it. Interestingly, on our taxable account I am not billed for the fee and they just sell positions to pay for it, but on the non-taxable account I am billed and send a check.

 

[OldShooter]

I pay an advisor and do budget for it. Interestingly, on our taxable account I am not billed for the fee and they just sell positions to pay for it, but on the non-taxable account I am billed and send a check.

Smart advisor. This maximizes your tax-sheltered money, and it's even possible that his fee on the tax-sheltered account will be deductible for you.

 

[ERD50]

If you look at FIRECalc, you'll see it defaults to include 0.18% expenses, typical for an index fund mix. SO I'd say "Yes", most people are including this in their planning.

http://firecalc.com/

How much are you paying in investing fees (expense ratio)?

The cheapest index funds charge around 0.18%. Some charge 3%, or more. If you are not sure this matters, be sure to investigate various fees here or using the option in "Investigate different choices. (Entries are typically 0.18 to 2)

-ERD50

 

[OldShooter]

In terms of your IRA, I do not think he is allowed, by tax law ...

Good to know. I assumed the advisor was just being tax-smart, but I don't use fee advisors.

 

[ERD50]

I appreciate that many here in the forum are "self managed". However, I have my portfolio managed for me for a variety of reasons, one of which is not being all consumed on a daily basis with the status of my investments. ...

Just wanted to comment because each has their own opinion on how they want to handle their finances and there is more than one way to accomplish that affordably.

Yes, you can have your opinion on this and choose your own path.

But it is flat out ridiculous to claim that DIY investing involves " being all consumed on a daily basis with the status of my investments". Buy a few funds, rebalance if you want. Or not. Have the distributions sent to your checking account. If you need more, sell a bit and rebalance then if desired. Or reinvest if the pile is growing.

Since we are all entitled to our opinions, I must say that I would be "all consumed on a daily basis with the status of my investments" if I had a financial advisor managing it for me. I'd be worried and wondering what the heck he/she is doing with my money!

To each their own, but don't misrepresent the effort required to DIY invest. It's easy.

-ERD50

 

[OldShooter]

Oops. Update: After I posted #13 I remembered that I do have one small experimental portfolio ($100K with a DFA advisor) where the fees are being deducted. I then found this:

Paying Money-Management Fees From Your IRA

 

[savory]

I pay an advisor and do budget for it. Interestingly, on our taxable account I am not billed for the fee and they just sell positions to pay for it, but on the non-taxable account I am billed and send a check.

I deleted my original answer after some more thought (and it was not correct). The money can be withdrawn from the IRA but cannot be used as a tax deduction. It does lower the IRA amount which would help in the future. You cannot use the IRA money to pay a non-IRA account.



This is from Turbo Tax - Management fees paid through the IRA account cannot be deducted. They simply reduce the value of your IRA.

On the other hand, management fees paid by cash or check and are not deducted from the IRA can be deducted as investment expenses.

 

[savory]

If you look at FIRECalc, you'll see it defaults to include 0.18% expenses, typical for an index fund mix. SO I'd say "Yes", most people are including this in their planning.

FIRECalc: A different kind of retirement calculator



-ERD50

So, this would suggest that anyone using Firecalc as one of their guides should include the fees for their financial analysis to be sure their spending is in line with the plan?

I suppose what most of us do is simply assume a return that includes the fees. I think they both work. But, I do wonder how many people got to the point of suggesting fees for advisers should be included but not fees for mutual funds. In my case, some of my money is managed by an adviser who purchases stocks/bonds, creating his own fund.

 

[LOL!]

On the other hand, management fees paid by cash or check and are not deducted from the IRA can be deducted as investment expenses.[/I]

Isn't that really only true if one itemizes on Schedule A and exceeds a 2% of AGI floor?

I don't have other miscellaneous itemized deductions, so to itemize deductions would mean I was paying outrageous fees.

 

[ERD50]

So, this would suggest that anyone using Firecalc as one of their guides should include the fees for their financial analysis to be sure their spending is in line with the plan?

I suppose what most of us do is simply assume a return that includes the fees. I think they both work. But, I do wonder how many people got to the point of suggesting fees for advisers should be included but not fees for mutual funds. In my case, some of my money is managed by an adviser who purchases stocks/bonds, creating his own fund.

With the defaults in FIRECalc, you do not "assume a return". It uses historical records. Unless you choose to use Monte Carlo analysis, but I don't do that, I don't think it is worthwhile and it isn't the default anyhow.

And yes, if your fees are different than the 0.18% default, change it - just like any other default. That's what a default is.

-ERD50

 

[savory]

Isn't that really only true if one itemizes on Schedule A and exceeds a 2% of AGI floor?

I don't have other miscellaneous itemized deductions, so to itemize deductions would mean I was paying outrageous fees.

I think you are correct concerning the tax code. And, yes if this would be your only deduction, I expect you would be paying "outrageous" fees to reach the minimum.

 

[RE2Boys]

If the expense is material, it should be budgeted for. And remember that in many (most) cases, the "advisory" or "management" fee is not dependent on if you make any money from your investments or not

 

[Whisper66]

I hold Vanguard low cost mutual funds and misc stocks. I don't use a financial advisor so nothing budgeted there. I have no fees other than the operating expenses of the individual mutual funds. These are accounted for in the value of the fund and are so low (typically 0.1%) that they are blown away by any gains / losses on the funds. So I don't bother to specifically budget for them.

As many here, I don't even bother to look at the portfolio seriously except once per quarter. Might buy or sell something 2-3 times per year max.

 

[savory]

Based upon the feedback, I do not plan to include my adviser or fund fees in my expenses. Some of the contributors to the thread make a distinction between costs in a fund and an adviser. I do not see a difference as a cost between these two choices (only a strategy/lifestyle/pay out-of-pocket or deduction, etc) and most if not all people do not budget their fund expense as part of their 'household' expenses. As ERD50 reminded, Firecalc allows for the inclusion of any range of investment management costs which is captured in the Firecalc analysis.

Thanks for your feedback.

 

[btdt22]

No, because I see absolutely no reason to hire an advisor, and my Vanguard fee's are so low they are not worth the effort of tracking

 

[kgtest]

My excel spreadsheet lists the expense ratio for each fund and averages the expense ratio for my entire portfolio (weighted ave). I can then easily see immediately how much I can lower it by exchanging from higher cost funds to lower, plus mult the ave by the account bslance to relate my total annual fees.

I use this same approach. I know exactly how much my current expense ratio is .08%...but I roll-up any trading fees/commission for the year to get my annual number. Don't mind if one of my fund's fees goes up so long as the portfolio as a whole is within that .08-1% total expense.

Then..for my budget I roll that number up into all my fee's for the year. I like to track those and try and reduce them year over year when possible.