Thoughts on Fees ??

[ERD50]

I've probably spent as much time trying to understand investing as I have engine repairs and it's still Greek to me. Investing that is, not engine repairs. ...

Then you are making it more complicated than it is. What is complicated about a 50-50 blend of a Total Stock Market ETF, and a Total Bond ETF?

Managing my investments though, is like gambling. I never really seem to read the players at the table with me right. ...

Now you sound like poster Boho, who is trailing badly in the stock market contest thread. It doesn't have to be about beating the other players, just get in the market and take a nap.

With investing, no one can predict future returns. ... You say it's just that easy, but it certainly isn't for people like me who worry about calling the shots on what represents decades of sweat off my brow. When I retired 5 years ago next month, and signed up for Fidelity to manage my portfolio, I was asked what my goal was. I told them I wanted to average 7% AFTER their fees. Checking yesterday, so far, they have. ...

That's interesting. As you say, no one can predict returns, so I'm curious how they responded to a "request" for 7% returns? I'd assume they did some historical analysis, and determined an AA that has met that return in the past? If they were able to meet that in the past 5 years, that is very likely more a factor of the market than any actions they took.

Link

... My portfolio has grown 42% since December of 2012. ...

And a conservative 50-50 blend of Eq/Fixed ETs returned higher than that (54.8%).

... Prior to that, for the almost 30 years I managed my accounts through my 401K and 457 and the limited choices those plans had for funds, I averaged less than half that; maybe 3 or 4%. ...

Well, maybe 30 years ago, you were not informed that a simple indexing strategy can do so well. But today it is so easy.

... Security is important to me, to the point that I, as an amateur, don't feel comfortable managing something that is so important to my standard of living. ...

But if the people managing your portfolio did ~ what a 50/50 DIY blend has done, they are very likely to be taking just as much risk as that. They simply don't have any magic that will provide those returns without the associated risk.

... Thanks for taking time to address my post. I am fortunate to have found this site and I wish I could feel comfortable managing my own investments, but it's like going to the dentist for me; terrified of the potential for pain after trying to nut through a toothache on my own. Just give me the knock-out gas and wake me gently when it's over. Ha!

And again, it seems to only because you've decided it's painful, not because it is.

Now, I see a later post your reply to Texas Proud, and I have to say you have a point - if it is so easy, his wife should be able to do it to. I plan to show Dw that this is all it takes. I'm not big on rebalancing, I can just tell her to make the RMDs from the side that is out of wack, and that's close enough. Now that's pretty easy, no?

-ERD50

 

[Chuckanut]

The concept that grabbed me is one I had not thought about until I read it here!
If you have a WR of 4%, and a fee of 1%, the fee is taking 20% or 25% of your yearly income..

This is so true in many other areas.

A few years ago a restaurant owner in Italy explained it to me when I asked if he would like cash or a credit card? The credit card fee may only be 3% of the total bill, but it is 15% of net profit on the meal. Sometimes more depending on what was ordered. That's why I always pay cash in mom-and-pop places.

Another way to think about it is how many hours would you have to work to earn what that 1% fee is taking from you? Before taxes and after taxes . That can be scary.

 

[VanWinkle]

Or consider it from the portfolio angle with constant income to you - say you had saved up $1,000,000 and felt comfortable with a 4% WR, providing you with $40,000.

If the FA is charging 1%, you are now withdrawing $50,000. To maintain the same 4% WR, you need $1,250,000. The FA just charged you $250,000!

And how long would it take someone to grow their portfolio from $1,000,000 to $1,250,000? Could be a long time, depending.

Not exactly, the 1% doesn't increase with inflation, and decreases if your portfolio drops (and the fees contribute to that drop!), so actual success rates aren't impacted as much as it seems at first glance - but it's still a lot of dough.

Do people really think they will screw up a lazy portfolio so bad that they will need to drop their income withdraws by 25%? I just don't see it.

EDIT/ADD: OK, ran it in FIRECalc, asking for 100% success on initial $40,000 withdraw. With default 0.18% expenses, starting portfolio must be $1,234,804. Adding 1% fee to that, 1.18% expenses, an additional $198,727 is required at the start.

-ERD50

You can lead a horse to water, but the horse just ain't thirsty!!!

 

[ERD50]

You can lead a horse to water, but the horse just ain't thirsty!!!

Oh, I know. Posts like this often aren't so much for the person responding, it's to get the information out there for others to see, and evaluate on their own.

-ERD50

 

[Texas Proud]

But we were all told how simple managing your own funds is in the first reply to my first post here. Why does DW and son have zero clue? We were told how simple it really is to manage your own investments after all. I'm being facetious, of course, but you make my point; not everyone can grasp the concept, has the desire to, or should be trusted with the management while on a learning curve to get up to speed.

DW is an artist... has little concept of finance at all... I could set it up in a simple portfolio and tell her to keep it the same...


DS will get it... I just have not taught him anything yet except the basics... but he is doing his own investments with the little money he has...


My point would be that most people are smart enough to handle their own finances and would be rewarded for doing so... and that if they had questions they can go to a fee only advisor once in awhile and still be ahead of the game...

But there are maybe 10% that just will not get it.... however, most of those people do not have much money...

 

[Scuba]

DW is an artist... has little concept of finance at all... I could set it up in a simple portfolio and tell her to keep it the same...


DS will get it... I just have not taught him anything yet except the basics... but he is doing his own investments with the little money he has...


My point would be that most people are smart enough to handle their own finances and would be rewarded for doing so... and that if they had questions they can go to a fee only advisor once in awhile and still be ahead of the game...

But there are maybe 10% that just will not get it.... however, most of those people do not have much money...

I can assure you that there are many wealthy and smart people who prefer to have an FA. Otherwise how would all the FA's managing seven+ figure portfolios stay in business? It's not that their clients are too stupid or too poor to "get it." They just place a different value on the service they get than a DIY person does.

Both options are viable choices.

 

[Texas Proud]

I can assure you that there are many wealthy and smart people who prefer to have an FA. Otherwise how would all the FA's managing seven+ figure portfolios stay in business? It's not that their clients are too stupid or too poor to "get it." They just place a different value on the service they get than a DIY person does.

Both options are viable choices.

I will agree in a way... when I was young and doing taxes there were many rich people who paid good money for tax services and also had FA... the reason is that they were very successful in their field and could make much more money doing what they did and paying someone else to handle all the other stuff...

I do get it...

But I also know that there is fear in some people... I helped out a BIL for years with taxes... he was very smart and had the ability to know what to do... he just had a phobia about it and his mind went crazy.... he was also this way in investing... I did change him for investing purposes but never for taxes...

 

[target2019]

The original comment was that the fee was 0.0025% per quarter, so you need to multiply to approximate the annual amount. But the math is wrong. If you have $1MM and are assented a fee at 0.0025%, then you multiply $1MM*0.000025 = $25. You can't just drop the % sign without adjusting the number.

Thanks for the correction. The post I commented on would work out like this:

.0025% x 4 = .01%

The problem, I think, is that OP has made a mistake. I think he meant 1% (use .01 multiplier). In any event, I fear this is another topic where we don't know clearly what the OP has. I'm thinking it must be the PAS account you mentioned. $1MM x .01 =$10,000.

I wouldn't pay that yearly, either, as most have mentioned.

 

[gauss]

I will agree in a way... when I was young and doing taxes there were many rich people who paid good money for tax services and also had FA... the reason is that they were very successful in their field and could make much more money doing what they did and paying someone else to handle all the other stuff...

I do get it...

But I also know that there is fear in some people... I helped out a BIL for years with taxes... he was very smart and had the ability to know what to do... he just had a phobia about it and his mind went crazy.... he was also this way in investing... I did change him for investing purposes but never for taxes...

Indeed, I believe that many people who pay the FA, and seem to be happy with the results, are really just paying for piece of mind and hand holding.

If the setup is not transparent enough so that they see how much they are spending vs. D-I-Y then they are happy - as long as the market is giving good returns.

-gauss

 

[gauss]

Me too.

My FA beat my benchmark by more than his fee for the last 3 years. He is worth what I pay him. Even though I'm constantly working to blow more dough he keeps making me money faster than I can spend it. My net worth continues to rise.

But at what risk level?

I could easily beat the market during an upswing by just investing in geared/leveraged total market ETFs (ie 2x 3x).

As long as the market goes up, I will in all likelihood beat the market returns by a significant amount. Did I work harder to gain this return? (no) Do I have much more talent than the average bear? (no)

What I did was to introduce more risk into my portfolio.

Now if the market goes down over the same interval, I will take a beating relative to the market returns.

The strategy that I have described introduces significant additional risk into a portfolio vs a nominal total market index approach.

Is your FA really doing such a good job or is it really just the result of the bull market overall?

-gauss

 

[gerntz]

The concept that grabbed me is one I had not thought about until I read it here!
If you have a WR of 4%, and a fee of 1%, the fee is taking 20% or 25% of your yearly income..

While true, that's not relevant to this thread since the fees here are dramatically lower than that.

 

[gerntz]

Or consider it from the portfolio angle with constant income to you - say you had saved up $1,000,000 and felt comfortable with a 4% WR, providing you with $40,000.

If the FA is charging 1%, you are now withdrawing $50,000. To maintain the same 4% WR, you need $1,250,000. The FA just charged you $250,000!

Actually, the FA doesn't charge that $250,000 till the fees add up to $250,000, not immediately as "just" states.

 

[gerntz]

But that assumes DIY is frustrating and takes a lot of time. It doesn't. Pick an AA (which you would have already done through discussions with your FA), choose a 2-3-4 fund "lazy portfolio", and forget about it. Even rebalancing has been shown to have questionable results. There are no ongoing decisions to make.



Studies say that is unlikely. How can you be so convinced?



Picking a few funds and forgetting about them just doesn't compare to gaining the tools, knowledge, experience and time to learn/perform car repair. Unless we are talking about changing an air filter - that's about equivalent, assuming it's one of those air filters that is easy to change - not all of them are.

Do as you please of course, I just don't like to see posts go unchallenged that might convince others that this is as difficult as car repairs. It's not.

-ERD50

How someone can decide what is frustrating for another escapes me.

 

[gerntz]

It is even worse than that. Taking 4% annually, for every $75 you get, they get $25. That means they are getting 33% of the income you are getting!

No. They are getting $20 for every $80 you get or 20% of your income.

 

[gerntz]

This is so true in many other areas.

A few years ago a restaurant owner in Italy explained it to me when I asked if he would like cash or a credit card? The credit card fee may only be 3% of the total bill, but it is 15% of net profit on the meal. Sometimes more depending on what was ordered. That's why I always pay cash in mom-and-pop places.

Another way to think about it is how many hours would you have to work to earn what that 1% fee is taking from you? Before taxes and after taxes . That can be scary.

Why does it matter what his profit is? And his bill to you was the same whether you paid by credit card or cash. Net, I don't get it.

Why the 1% keeps being thrown escapes since that's not the fee presented. It feels like a fixation.

 

[gerntz]

Yes, I use an FA. The fee is way closer to 0.01% than 1.00%.

 

[ERD50]

Actually, the FA doesn't charge that $250,000 till the fees add up to $250,000, not immediately as "just" states.

Of course. But if you follow what I'm saying, you need (nearly) that much additional to fund those fees ongoing. So it can be accounted for as an "up-front" charge. If I need to have that money saved up to pay the FA, I can certainly look at it that way (and probably should!).

-ERD50

 

[ERD50]

Yes, I use an FA. The fee is way closer to 0.01% than 1.00%.

I've never heard of a 0.01% fee for an FA charging based on the portfolio amount (AUM - Assets Under Management model). I'm not aware of any that are anywhere near that low (maybe ~ 0.25% from some of the 'robo-advisers'?).

Or maybe you pay by-the-hour for an occasional consult? I don't think anyone here has any concerns with that, esp if it's costing you only 0.01%, and you get some value from it.

edit - OK, technically a 0.5% fee counts as "closer to 0.01% than to 1.0", but what is "way closer"? Going to that many decimal places implies < 0.1%, or maybe even < 0.05?.

-ERD50

 

[jimbee]

How someone can decide what is frustrating for another escapes me.

ERD50 did not decide that. The post he quoted, by skipro33, stated "I've got lots better things to do with my time than to frustrate myself trying to figure out if I'm making the right decisions on what to invest in, when to rebalance, etc. ... ."

 

[CaliforniaMan]

It is even worse than that. Taking 4% annually, for every $75 you get, they get $25. That means they are getting 33% of the income you are getting!

And with the high mutual fund fees on top of that, if the total fee is 1.5% then they are getting 60% of the income you are getting. For every $1M under their control, in retirement you are getting $25000 per year and they are getting $15000. And if you are not retired they are getting that $15000 per year and you are getting zip, and just lost the compounding of that $15000.

Seems to me for that kind of money, one could learn what they need to know to manage their own money. Like put it in 3 low cost mutual funds, and forget about it.

No. They are getting $20 for every $80 you get or 20% of your income.

I knew I should have explained this better. Example: your projected total SWR is 4%. If you have a 1M portfolio, you can then safely withdraw $40,000 per year. If your FA is taking 1%, then they get $10,000 per year. You get only $30,000 (you have already determined that that the total SWR is 4% or $40,000 no matter where it goes, the total is always only $40,000).

This means you get $30,000 per year and they get $10,000 per year. They get 33% as much as you get, from your own money. That is $25 to every $75 you get, or $33 to every $100 you get, or 10K to every 30K you get.

I did not mean they get 33% of the total, but 33% as much as you get. You get 3 dollars and they get 1. So they get 1/3 of what you are getting.

To my mind this is the correct way to look at it, because what you really care about after determining the SWR is how much YOU get to spend, not the total withdrawal. So... the FA gets to spend 1/3 as much as you, are they really worth that?

My numbers were correct, but I did not explain it well. Hope this does better.

 

[VanWinkle]

But at what risk level?

I could easily beat the market during an upswing by just investing in geared/leveraged total market ETFs (ie 2x 3x).

As long as the market goes up, I will in all likelihood beat the market returns by a significant amount. Did I work harder to gain this return? (no) Do I have much more talent than the average bear? (no)

What I did was to introduce more risk into my portfolio.

Now if the market goes down over the same interval, I will take a beating relative to the market returns.

The strategy that I have described introduces significant additional risk into a portfolio vs a nominal total market index approach.

Is your FA really doing such a good job or is it really just the result of the bull market overall?

-gauss

I am guessing the FA sets the bench mark for the portfolio and it may not take leverage to beat the bench mark. However, the fees are the part that is hard to nail down as there are so many ways to "hide the cost" Ask your FA if you could just pay his complete expenses out of your pocket and listen to him stutter.......

There is nothing wrong with hiring a FA to handle your investments. You would make more money to hire him by the hour(Garrett Planning network) than Assets under management, high expense active funds, high turnover funds, loaded funds, increased taxes.

At least get the real cost to make your decision- but it is hard to get the real cost from a FA.

Good luck no matter which way you decide,

VW

 

[RobbieB]

I get to spend as much as I want. What I really care about is how much I'm making.

 

[gerntz]

Of course. But if you follow what I'm saying, you need (nearly) that much additional to fund those fees ongoing. So it can be accounted for as an "up-front" charge. If I need to have that money saved up to pay the FA, I can certainly look at it that way (and probably should!).

-ERD50

But if you have $250K more, you have it, not the FA - as you stated. Of course you can look at things as you like.

 

[gerntz]

I've never heard of a 0.01% fee for an FA charging based on the portfolio amount (AUM - Assets Under Management model). I'm not aware of any that are anywhere near that low (maybe ~ 0.25% from some of the 'robo-advisers'?).

Or maybe you pay by-the-hour for an occasional consult? I don't think anyone here has any concerns with that, esp if it's costing you only 0.01%, and you get some value from it.

edit - OK, technically a 0.5% fee counts as "closer to 0.01% than to 1.0", but what is "way closer"? Going to that many decimal places implies < 0.1%, or maybe even < 0.05?.

-ERD50

IMO, I'd say 0.25% qualifies as way closer. Wouldn't you?

 

[gerntz]

ERD50 did not decide that. The post he quoted, by skipro33, stated "I've got lots better things to do with my time than to frustrate myself trying to figure out if I'm making the right decisions on what to invest in, when to rebalance, etc. ... ."

Post #32:

"But that assumes DIY is frustrating"