Are excessive financial fees eating your returns?

[gozer]

mostly because I was more interested in furthering the realization that NET RETURN TRUMPS LOW EXPENSES than talking about FAs.

If what you are interested in is did I make money or did I lose money. Then bottom line returns are quite appropriate and certainly the gold standard indicator.

If you are trying to determine if the value added by the FA is appropriate, then you start comparing your performance to that of other similar things without the FA. Additionally you, and only you, have to decide what the intangibles like hand holding and/or support for kids should you get hit by a bus are worth. All other people can do is identify the other things and point out the difference in the basic numbers.

Like others I am troubled, that your FA sounds like he is day trading mutual funds. I can't fathom why he would do this. Do you know why?

 

[Idnar7]

"you need to focus on net return after fees and expenses are accounted for"

I did at the end of third quarter last year. In a great market my 65/35 portfolio was making 3%. Fees and commissions were one third of that 3% leaving me with a net of 2%.

My former FA was a fiduciary.................for himself.

 

[gozer]

Thanks for the support Dash, but it is unlikely that we will convince them that I only pay the 1%. So be it. But this again goes back to my original comment on post 3 that one should focus more on net return than fees and expenses. Frankly, with the Mechanical Investing I did to grow our assets, the "too many expenses" camp would have had the same problem, given that some of the screens that I ran were weekly and could result in 20 trades per week. The results were by far worth it for me, but it is a style of investing that requires a high tolerance for volatility and strict discipline.

I don't think anyone has trouble believing that the front end load charges are waived. As others have pointed out, 401Ks often have that kind of arrangement where load and/or deferred sales charges are waived.

Certainly the expense ratio is a different matter. You showed us 9 funds from 9 different firms. To waive those fees would require a special relationship with each and every one of those firms. Something I have never seen. Or perhaps your FA pays those fees out of his own pocket. That I have seen. But I don't think your 1% FA fee is high enough to cover that. Unless your FA is a really close friend that is doing you a huge favor and is making almost nothing from your business.

 

[InParadise]

There are two ways to increase returns. Successfully time buying and selling decisions, or allocate more assets to higher risk investments. My guess is most members here feel that successful timing is either not possible or can be done once or twice but not continuously. That leaves higher risk as the primary driver of satisfactory returns.

We all have different combinations of private & public pension / annuity / self-financed retirement income streams, but as the reliance on portfolio increases, risk management becomes more important. If you want the conversation to focus on the point you highlighted it might be interesting to know how you manage portfolio risk to get those returns.

Michael, the first step in investing is to set your goals, which include risk tolerance and portfolio allocation. This is a pretty individual thing and has absolutely nothing to do with my assertion that you can not look at fees and expenses without considering return. You then look at ways to invest to achieve those goals.

For example, if in comparing two funds of similar risk, funds A and B, you see that fund A has a fee of 0.5%, while fund B will cost you 2%, do you know what fund you will go with? No. You don't have enough information. It is highly unwise to make a decision based on one data point in isolation of all other factors, which is how the How Low Can You Go crowd was coming across to me. You need to see the history of rates of return to start the analysis, realizing of course that past performance is no indication of future results and YMMV. Educated guesses have to be made when figuring out how to invest. If you want predicted results, you take the money market with it's low returns that reflect low risk, or buy a cd.

So if the historical returns of these funds with equal risk show that Fund A's returns are 7% and B's are 12%, (assuming analysis to determine if there were extenuating factors for the difference,) which would you chose? Net return on A is 7-0.5=6.5. Net return for B is 12-2=10. Obviously, numbers are for demonstration purposes only.

This really is not radical thought, and does not even challenge the assertion here that typically lower costs correlate to higher returns. It is simply a reminder that you need to consider all factors, including those well beyond this simplistic example, when deciding where to put your money.

 

[gozer]

Michael, the first step in investing is to set your goals, which include risk tolerance and portfolio allocation. This is a pretty individual thing and has absolutely nothing to do with my assertion that you can not look at fees and expenses without considering return. You then look at ways to invest to achieve those goals.

For example, if in comparing two funds of similar risk, funds A and B, you see that fund A has a fee of 0.5%, while fund B will cost you 2%, do you know what fund you will go with? No. You don't have enough information. It is highly unwise to make a decision based on one data point in isolation of all other factors, which is how the How Low Can You Go crowd was coming across to me. You need to see the history of rates of return to start the analysis, realizing of course that past performance is no indication of future results and YMMV. Educated guesses have to be made when figuring out how to invest. If you want predicted results, you take the money market with it's low returns that reflect low risk, or buy a cd.

So if the historical returns of these funds with equal risk show that Fund A's returns are 7% and B's are 12%, (assuming analysis to determine if there were extenuating factors for the difference,) which would you chose? Net return on A is 7-0.5=6.5. Net return for B is 12-2=10. Obviously, numbers are for demonstration purposes only.

This really is not radical thought, and does not even challenge the assertion here that typically lower costs correlate to higher returns. It is simply a reminder that you need to consider all factors, including those well beyond this simplistic example, when deciding where to put your money.

And now you sound like most everybody else on this forum. Different than you sounded 7 pages ago.

 

[InParadise]

And now you sound like most everybody else on this forum. Different than you sounded 7 pages ago.

Which is because you have finally gotten rid of your furor over my initial example to this extraordinarily simple way of looking at something. You got distracted by the example, the imagined and perceived bragging, the example offered sans data to "prove" I was not lying, to see the message. Why do you think I kept on trying to get away from the whole FA example? It really had nothing to do with the concept.

 

[travelover]

I am happy to go out on a limb here: IP is not MM. Not in the slightest. She isn't crazy and she is very bright. Lets not make that comparison.....

We shall see. Me, I'm gonna pop some more popcorn.

 

[InParadise]

We shall see. Me, I'm gonna pop some more popcorn.

Gee, I guess this site isn't all that different from TMF after all!

 

[aja8888]

We shall see. Me, I'm gonna pop some more popcorn.

I wish I could actually get some tips or pointers here instead of just reading all this stuff about low expenses, front end loads, waived fees, the FA on the pedestal, MM (?), churning mutual funds, nets return is golden, etc, etc. But it is a hoot to watch this go on.

 

[brewer12345]

Yes, taxes are something we are putting on the table in next weeks meeting. Most of the FA assets are in retirement accounts, so the churn is less critical there, but we want our taxed account managed for taxes, even at the sacrifice of return, which is not the only factor in this case. We want to use our low tax rate to convert TIRAs to Roths, potentially qualify for reduction of college costs, and maybe even receive an ACA subsidy.

Our FA is not a tax guy, and will do no more regarding taxes than recommend someone else, so this is one area that we need to set the strategy and be firm.

In that case, I think your only realistic option will be to set up a traditional low cost ETF buy and hold allocation portfolio in the taxable account where trades are done once a year and focus on a combination of rebalancing and tax maneuvers. You will either have to take this over yourself or get him to agree that there is a once a year rebalance and the trades get your OK first.

 

[Ready]

It certainly was not my intent when I posted this initial thread to generate so much discussion. I figured I was posting an article that pretty much said what the members on this forum already knew. I guessed a few people would read it and said, yup agree with that, and it would fade into oblivion.

After reading 135 responses, all seemingly focused on trying to read the mind of one individual, I am left trying to ponder what we have learned from all of this.

 

[gozer]

Which is because you have finally gotten rid of your furor over my initial example to this extraordinarily simple way of looking at something, and got distracted by the example, the imagined and perceived bragging, the example offered sans data to "prove" I was not lying, to see the message. Why do you think I kept on trying to get away from the whole FA example? It really had nothing to do with the concept.

You did open with a very fantastic claim. You then got what I would consider very mild jabs from people on the forum. Most of the initial comments were on point. I seriously doubt there was any malice or furor directed your way. Mild amusement was the strongest emotion I have personally been able to muster in this thread.

 

[aja8888]

After reading 135 responses, all seemingly focused on trying to read the mind of one individual, I am left trying to ponder what we have learned from all of this.

See post 134 above.

 

[gozer]

It certainly was not my intent when I posted this initial thread to generate so much discussion. I figured I was posting an article that pretty much said what the members on this forum already knew. I guessed a few people would read it and said, yup agree with that, and it would fade into oblivion.

After reading 135 responses, all seemingly focused on trying to read the mind of one individual, I am left trying to ponder what we have learned from all of this.

That you're are a trouble maker.

 

[InParadise]

You did open with a very fantastic claim. You then got what I would consider very mild jabs from people on the forum. Most of the initial comments were on point. I seriously doubt there was any malice or furor directed your way. Mild amusement was the strongest emotion I have personally been able to muster in this thread.

I don't care. The only impact of the way my statements were received was on my willingness to go into details.

But as to your assertion that my message changed, I quite literally opened with "Hmmm, it's all about net returns after fees." Ended with "NET RETURN TRUMPS LOW EXPENSES." Chilling how very different those two statements are. (Being sarcastic, in case you are uncertain. Don't want another 100 posts or so analyzing it.)

 

[Texas Proud]

I don't think anyone has trouble believing that the front end load charges are waived. As others have pointed out, 401Ks often have that kind of arrangement where load and/or deferred sales charges are waived.

Certainly the expense ratio is a different matter. You showed us 9 funds from 9 different firms. To waive those fees would require a special relationship with each and every one of those firms. Something I have never seen. Or perhaps your FA pays those fees out of his own pocket. That I have seen. But I don't think your 1% FA fee is high enough to cover that. Unless your FA is a really close friend that is doing you a huge favor and is making almost nothing from your business.

The fees by the MFs are taken out of the fund proceeds... IP is not seeing the expenses and is being told that there are none to her... I would agree there are no direct expenses to her.... but I have no direct expense with my Vanguard funds....


I do think that IP does believe what she is saying... I am almost certain what she is saying is wrong... all funds have expenses they have to cover... except for when a fund is starting out (when some waive fees), all are going to charge for these expenses...

Since one of my prior jobs was as a trustee investing hundreds of million of dollars, I know there are hidden fees that nobody tells the clients... I remember getting in trouble with my bosses when I did not move money from one investment to another since the new investment had twice as much kickback as the first... I said I would only move it if the client agreed.... which of course they did not....

 

[Texas Proud]

I don't care. The only impact of the way my statements were received was on my willingness to go into details.

But as to your assertion that my message changed, I quite literally opened with "Hmmm, it's all about net returns after fees." Ended with "NET RETURN TRUMPS LOW EXPENSES." Chilling how very different those two statements are. (Being sarcastic, in case you are uncertain. Don't want another 100 posts or so analyzing it.)

I agree with your stmt to a degree... you have to take risk into account.. IOW, a risk adjusted net return trumps low expenses....


Right now, companies like Tesla and Netflix have had great returns.... but I would suggest that these companies are risky to invest in.... great return, but is it worth the risk

 

[gozer]

I don't care. The only impact of the way my statements were received was on my willingness to go into details.

But as to your assertion that my message changed, I quite literally opened with "Hmmm, it's all about net returns after fees." Ended with "NET RETURN TRUMPS LOW EXPENSES." Chilling how very different those two statements are. (Being sarcastic, in case you are uncertain. Don't want another 100 posts or so analyzing it.)

Your first post contained the following as its second sentence. This is the fantastic claim that I and several others have repeatedly brought up in this thread:

Our FA beats benchmark every time.

The comment about net returns after fees, is not a fantastic claim in any way.

 

[travelover]

.........After reading 135 responses, all seemingly focused on trying to read the mind of one individual, I am left trying to ponder what we have learned from all of this.

On a really slow day, even the firemen enjoy a cat up in a tree.

 

[Chuckanut]

My comments implied I was not involved at all, mostly because I was more interested in furthering the realization that NET RETURN TRUMPS LOW EXPENSES than talking about FAs.

I would say that, IMHO, expenses are a factor in the Net Return. To focus only on expenses would be foolish. Remember the apocryphal story of an early computer that was programmed to minimize the expenses of a factory. It's recommendation was to shut the factory down. That does minimize expenses.

Net Return is the goal and how we get there varies according to many things, including our personal experiences, likes, dislikes and tolerances.

 

[gozer]

We have learned the #1 life lesson: You can't control other people.

When reading this thread or one of the threads it referenced, I learned that somebody bought a Tesla. I have been dying to ask about it, but didn't want to go any further into the weeds.

 

[Chuckanut]

We have learned the #1 life lesson: You can't control other people.

And controlling how people think is even harder than controlling what people do.

 

[foxfirev5]

It's been a slow morning so I read through these posts trying to reach a conclusion. Now it's time to move on. Nothing has changed anyone's mindset. If you feel secure with an FA and they get your desired results, go for it. If your confident in your abilities and want to go alone, go for it.
I've always been a do it yourselfer in most aspects of life. Hence I spend way to much time evaluating investments yet sticking to a fixed AA with predominately low cost index funds. It's something I can justify and live with the consequences.
However if I had to put another timing chain in the old Dodge van I'd probably take it to a mechanic rather than spending two days in the driveway. And his labor would represent about 75% of the total cost.

 

[Chuckanut]

All that fuss over a well known fundamental of investing, especially here, net returns...wasn't that fun. Too bad low expense index funds provide better net returns than other options more often than not. I don't recall seeing any of the regulars here reporting returns before expenses, but we have seen folks report returns before FA fees. I still didn't learn anything about how one might find the exceptions, maybe I missed it.

+1

Hopefully, we protected some newbies from blindly trusting the first FA who cold calls them.

 

[aja8888]

+1

Hopefully, we protected some newbies from blindly trusting the first FA who cold calls them.

I guess I may still be a newbie of sorts here (based on the post counts). I do not have a "trusted FA", or any FA, for that matter.

Between this thread and Cucumber's thread on leaving Ameriprise and all that's been exposed about the tactics of the Ameriprise FA's, it appears to me that FA's need to make a living also. But at least in these instances, they are not selling variable annuities to the OP's. (or are they?)