Are excessive financial fees eating your returns?

[Ready]

A nice article in today's edition of USA Today. It summarizes how excessive fees can become over time, and how overpriced financial advice really is. I know this is not new information to the members of this forum, but I thought it was nice to see an article with such a strong opinion published in a mainstream newspaper. Hopefully it will catch the attention of those who don't think about this stuff and allow others to make far too much off their retirement savings.

Are excessive financial fees eating your returns?

 

[gozer]

Nice article. I'm pleased to see the Motley Fool hasn't completely gone off the rails with the sales pitch and sound bite articles and will still sometimes put out good stuff. Kind of like the old days.

 

[InParadise]

Hmmm, it's all about net returns after fees. Our FA beats benchmark every time. And we can pay his 1% from our taxed accounts for our IRAs, allowing us to accrue an extra 1% in our retirement accounts year after year, without paying any conversion taxes.

And BTW, we don't get sloughed off to low cost index funds. We have access to top load based funds without paying the loads, and have zero transaction fees. No fees above the 1%, even if we take part of our funds to actively trade, which the FA does not get a percentage of.

Works for me.

 

[brewer12345]

IP, just out of curiosity: if this guy is such a whiz, why does he settle for your measly 1%? He could be getting 1 & 20 on a billion dollars or better if he is that good.

 

[InParadise]

Volume? He only does business by word of mouth. We are in our third year with him after friends recommended him. It's nice not to have to deal with investments anymore. He's also with UBS, getting volume access to the top funds that way, as opposed to being an independent. Was wonderful in dealing with transfer of assets when Dad died, and will guide our kids when we pass. They have free accounts with him too.

I drank the TMF cool aide for quite some time, and indeed it was worth my while, but frankly if they try to say you should do it without a FA, these days it tends to be about steering you towards a for fee subscription of their own.

 

[photoguy]

My default view on someone who consistently "beats their benchmark" is that they have the wrong benchmark. Don't know about InParadise's FA, but this is a game played by many.

 

[InParadise]

My default view on someone who consistently "beats their benchmark" is that they have the wrong benchmark. Don't know about InParadise's FA, but this is a game played by many.

Except that I did my own investing and know how to check his figures. I would agree that there are some pitiful FAs. Trying to get MIL to change hers to ours, but IMO ours is the real deal.

 

[Dash man]

Beating a benchmark the past three years is not an indicator of a good financial advisor, but how you perform in the down years when he still takes his 1 percent will tell volumes.

 

[CaliforniaMan]

Hmmm, it's all about net returns after fees. Our FA beats benchmark every time. And we can pay his 1% from our taxed accounts for our IRAs, allowing us to accrue an extra 1% in our retirement accounts year after year, without paying any conversion taxes.

And BTW, we don't get sloughed off to low cost index funds. We have access to top load based funds without paying the loads, and have zero transaction fees. No fees above the 1%, even if we take part of our funds to actively trade, which the FA does not get a percentage of.

Works for me.

I don't understand your point at all. Beats the benchmark every time? How long is every time, what benchmark? We have been in a rising market for five years now. "we don't get sloughed off to low cost index funds. We have access to top load based funds..." How are your "top" funds better than indexes? Greater returns always require greater risk and a replay of the last 5 years is not guaranteed.

 

[brewer12345]

He's also with UBS, getting volume access to the top funds that way, as opposed to being an independent.

When I worked in asset management, UBS was referred to as "U Be Stoopid" for good reason.

I hope you have beaten the odds. Good luck.

 

[gozer]

If I could beat the market benchmarks every time I would be so rich, Bill Gates would personally handle my tech support, Larry Ellison would clean my yacht, Carlos Slim would mow my grass and the Walton family would do my grocery shopping.

 

[samclem]

IP, just out of curiosity: if this guy is such a whiz, why does he settle for your measly 1%? He could be getting 1 & 20 on a billion dollars or better if he is that good.

He's probably got a gig like that. He just takes some small retail clients as a way to pay back society for all it has given him. He'd charge them nothing at all, but then they wouldn't appreciate the fantastic value of what they are getting.
The generosity of some people is heartwarming.

 

[Ready]

He's probably got a gig like that. He just takes some small retail clients as a way to pay back society for all it has given him. He'd charge them nothing at all, but then they wouldn't appreciate the fantastic value of what they are getting.
The generosity of some people is heartwarming.

In all fairness though, someone does have to pay for his yachting expenses.

 

[Animorph]

Hmmm, it's all about net returns after fees. Our FA beats benchmark every time. And we can pay his 1% from our taxed accounts for our IRAs, allowing us to accrue an extra 1% in our retirement accounts year after year, without paying any conversion taxes.

And BTW, we don't get sloughed off to low cost index funds. We have access to top load based funds without paying the loads, and have zero transaction fees. No fees above the 1%, even if we take part of our funds to actively trade, which the FA does not get a percentage of.

Works for me.

You make it sound like a good thing...

 

[M Paquette]

Hmmm, it's all about net returns after fees. Our FA beats benchmark every time. And we can pay his 1% from our taxed accounts for our IRAs, allowing us to accrue an extra 1% in our retirement accounts year after year, without paying any conversion taxes.

And BTW, we don't get sloughed off to low cost index funds. We have access to top load based funds without paying the loads, and have zero transaction fees. No fees above the 1%, even if we take part of our funds to actively trade, which the FA does not get a percentage of.

Works for me.

I'm glad it works for you.

It sets off alarm bells for me.

Our FA beats benchmark every time.

Um. Is the benchmark appropriate? Risk level matches the risk of your actual portfolio? Similar volatility?

BTW, I have a good grasp of mathematics and statistical analysis. I'm pretty sure I know how this story ends, to an 80% probability over the next five years.

 

[gozer]

BTW, I have a good grasp of mathematics and statistical analysis. I'm pretty sure I know how this story ends, to an 80% probability over the next five years.

SEC investigation and indictment or just under performance?

 

[InParadise]

You make it sound like a good thing...

I get zero benefit from trying to convince you guys, and have zero desire to do so. After all, I know how hard I was to convince and that is way more work than I care to do.

But the one thing I just don't understand is the desire to put your funds in an index fund. I've never been a fan of them and never used them when I was handling our investments. The result was that when the market plunged, acerbated by all the lemmings who had thrown their retirement accounts into these well publicized funds panicking and pulling their assets from the market, my account was not badly impacted. IMO index funds are the McDonalds of investing. Everyone knows about them, and many eat there for convenience.

Please realize that I am not calling you a lemming for using these funds, but it seems to be the investment tool of choice for the general public who has not yet learned what else they can do with their money. And when so many people who don't realize the market doesn't only go up, nor understand that panic selling can be the very worst thing own this investment vehicle, they can trigger irrational declines. So if you invest primarily in index funds, how do you protect yourself from the actions of the lemmings throwing themselves off the cliff when the volatility got to be too much for them?

 

[Shanky]

This sounds like the pitch at the beginning of every episode of American greed. It never ends well.

 

[InParadise]

This sounds like the pitch at the beginning of every episode of American greed. It never ends well.

Is there a way to see who a poster is responding to when they don't include a quote?

 

[MichaelB]

Is there a way to see who a poster is responding to when they don't include a quote?

There is no SW tool to do that, and once in a while it does lead to confusion. In this case I understood this

This sounds like the pitch at the beginning of every episode of American greed. It never ends well.

was referring to this

Hmmm, it's all about net returns after fees. Our FA beats benchmark every time.

 

[RunningBum]

But the one thing I just don't understand is the desire to put your funds in an index fund....

I could just as easily write up a straw man argument that people investing in managed funds chase returns, and panic easily when the market turns, so how do you protect yourself from the volatility of those funds? And I could further argue that index fund holders tend to be more of the "buy and hold" mentality so those have less volatility in bad times. So I'm not inclined to debate your straw man argument that in my opinion is not valid.

History has shown that while some managed funds outperform the index that matches their type of investment, more do not. Congrats on finding a manager who can pick funds or perhaps individual stocks that beat the index for three years, or however long it's been. Maybe you'll be fortunate enough that he or she can continue to beat it by 1% in the future to cover the fees and still do better. I wouldn't try to convince you to invest your money any other way.

 

[InParadise]

I could just as easily write up a straw man argument that people investing in managed funds chase returns, and panic easily when the market turns, so how do you protect yourself from the volatility of those funds?

I'm not arguing, I am asking a question based on observations made when I was handling the investing. I'm not looking to convince others nor be convinced to change the way I invest. I am comfortable with it, and realize there is more than one way to go.

History has shown that while some managed funds outperform the index that matches their type of investment, more do not.

Given the changing nature of investing, with it opening up to anyone who has the low minimum $$ to deposit and exiting the largely professional or uber wealthy investor only base, I wonder how far back historical data is valid for today's market which has experienced a paradigm shift via self-managed accounts. Is the truism still valid?

 

[REWahoo]

Given the changing nature of investing, with it opening up to anyone who has the low minimum $$ to deposit and exiting the largely professional or uber wealthy investor only base, I wonder how far back historical data is valid for today's market which has experienced a paradigm shift via self-managed accounts. Is the truism still valid?

Interesting question. A search of "actively managed funds vs. index funds" came up with this:

October 6, 2013, 5:00 a.m.

In the last five years, stock mutual fund managers had two big opportunities to show how much they deserved your money — and trust.
First, they could have limited your losses in the harrowing 2008-09 market crash. Second, they could have anticipated the market's powerful rebound and loaded up on the shares that would end up performing best.

But instead of demonstrating their brilliance, the majority of fund managers came up short: In most major categories of stock mutual funds, investors would have been better off just owning the market as a whole instead of trying to beat it, data show.

Actively managed mutual funds fall short again — and investors notice - latimes.com

 

[Texas Proud]

I'm not arguing, I am asking a question based on observations made when I was handling the investing. I'm not looking to convince others nor be convinced to change the way I invest. I am comfortable with it, and realize there is more than one way to go.



Given the changing nature of investing, with it opening up to anyone who has the low minimum $$ to deposit and exiting the largely professional or uber wealthy investor only base, I wonder how far back historical data is valid for today's market which has experienced a paradigm shift via self-managed accounts. Is the truism still valid?

I will just give an example that I saw on TV... I think you know who Cramer is...


When it was close to the end of the year.... he was saying that if he were ahead of the market he would sell everything and go watch movies... he would not want to take any risk of blowing it in the last month...



Also, every fund you are in has fees... period... there is no way of getting around it... they have to pay for their operations and the big salaries the fund manager wants... Why not put some info down where we could take a gander... what are your top 5 holdings if that is to many, the top 3... I would bet that there are some 12b-1 fees involved... you might not be paying a load, but I doubt you are getting it for 'free' like you say....

 

[Sarah in SC]

In Paradise, you may be assuming that everyone on the forum *only* uses index funds, when that may or may not be the case.

However, there is a strong DIY component to these pages, up to and including selecting your own active and passive investments rather than having a financial advisor do that for a fee.

Everyone makes their own decisions, though, and if you are happy, then that's it. But there are plenty of folks who enjoy the research element of DIY, and aren't likely be dissuaded from their own ways.

As always, YMMV.