Are excessive financial fees eating your returns?

[gozer]

That still doesn't mean the isn't another institutional class of the fund with very low fees only available to large brokerages for managed accounts. My FA is with USAA and they explained to me that their managed account services with a minimum investment of $500K would have access to these institution versions of their funds with very low fees. I chose not go use them since I enjoy picking individual stocks and didn't like the one percent annual management fee even with the low fund fees, but may consider it one day as I get older. Although USAA doesn't, it's possible her FA eats the fund fees so she only pays the one percent. Institutional fund fees make sense to attract larger accounts. I think everyone needs to cut her some slack. Do you really think institutional fund rates would be available to retail users of Morningstar?

I would expect the companies prospectuses to list all available classes. They already list classes that are not available to retail customers. They also have SEC registration requirements to deal with. What you are suggesting sounds like unregistered securities.

But none of that matters, IP identified the shares as class A.

 

[photoguy]

Many years ago I heard a recorded talk given by the photographer Galen Rowell. He complained that one of his most famous images "Rainbow over the Potala Palace" was being questioned by people who thought he must have photoshopped it. Several prominent photographers had been caught photoshopping images and not revealing this to the public. People who used Photoshop knew how easy it was to put a rainbow into a photo. Thus, Mr. Rowell's very famous photo 'must' be a fake.

This is a fantastic image which you can see here (it's the middle image): Mountain Light Photography: Fine Art Prints | Tibet and China

It was made in 1981 well before photoshop although I guess there are analog ways of doing the same thing.

Sorry for the OT post.

 

[MRG]

That still doesn't mean the isn't another institutional class of the fund with very low fees only available to large brokerages for managed accounts. My FA is with USAA and they explained to me that their managed account services with a minimum investment of $500K would have access to these institution versions of their funds with very low fees. I chose not go use them since I enjoy picking individual stocks and didn't like the one percent annual management fee even with the low fund fees, but may consider it one day as I get older. Although USAA doesn't, it's possible her FA eats the fund fees so she only pays the one percent. Institutional fund fees make sense to attract larger accounts. I think everyone needs to cut her some slack.

+1

What you say about the institutional class, available to brokerage firms is 100% correct. They do offer a discount to the normal fees. (EDIT to add, yes the fees must be disclosed) I don't know what the normal ER is, but it's real.

It's up to the OP to determine for themselves what their strategy is. The OPs method of testing their FA number's seems sound. Maybe 1% is ok for now, seems like they were open to thinking about future direction.

I've learned many things on this board. One is to accept other's ideas. Another is to understand we're not all the same.
Best wishes,
MRG

 

[brewer12345]

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.

IP, some of the stuff you have posted scares the crap out of me. However, your money, your choices. The one thing I would throw out to you is that the ability to manage taxes once you retire becomes hugely important and I would strongly suggest you figure out a way that makes sense to you to get hold of the reins on this one. A massively high churn portfolio like the one you have now will be a disaster once you retire. OTOH, if you are a longer term holder at least in your taxable account you can very judiciously manage tax exposure very simply. I expect to pay about zero federal income tax over the next 5 years even though I will realize significant qualified dividends and long term gains. If your portfolio is constantly churned, it becomes impossible to work the tax code to your advantage. That is a LOT of money to leave on the table.

 

[Chuckanut]

This is a fantastic image which you can see here (it's the middle image): Mountain Light Photography: Fine Art Prints | Tibet and China

It was made in 1981 well before photoshop although I guess there are analog ways of doing the same thing.

Sorry for the OT post.

It was not really off topic. It demonstrated that when some people commit a fraud even the honest guys who produce outstanding results sometimes get tarred with the same brush.

 

[Dash man]

I would expect the companies prospectuses to list all available classes. They already list classes that are not available to retail customers. They also have SEC registration requirements to deal with. What you are suggesting sounds like unregistered securities.



But none of that matters, IP identified the shares as class A.

Sounds like you must know everything about everything.

 

[gozer]

Sounds like you must know everything about everything.

Certainly not. But I did help write some of the software behind EDGAR which is used by the SEC to track what we are discussing.

 

[photoguy]

Looking at the first fund, AEGFX in more detail I see that it under performed the MSCI EAFE benchmark index that morningstar compares it to for the past 1,3 and 5 year periods once you take expenses into account. At 3 years it did the best with an annualized gain of .2 per year better than the index, but with an expense ratio of .85 it under performed the benchmark index. A small investor can buy the VGTSX fund with an expense ratio of .22%. A larger investor can get admiral shares of the same fund (VTIAX) with an expense ratio of .16%. Either of these core index funds beat the managed fund.

Is morningstar comparing the fund to an improper benchmark?

ETA: I should have said "benchmark index" instead of "index fund" in the first sentence. I have corrected this.

In my opinion, the right way to benchmark the fund is to look at it under a factor model such as the Fama French model. E.g, take a look at

Fama-French Factor Regression Analysis

Under this model the alpha (excess return) is 0.05% which is basically not different from 0. I wouldn't trust morningstar's benchmarking as they just pick something vaguely similar and it isn't really quantitative.

 

[samclem]

I think most folks here do a good job of responding appropriately to new posters. When a new person chimes in and says they know very little, but they think their FA might be taking advantage of them, they generally get supportive and non-critical comments. When a new poster says she's an experienced investor and has an "FA who beats the benchmarks every time" and is happy that she's not getting "sloughed off into low-cost index funds", then it's fitting that the discussion go exactly where it went. Other people read this stuff.

If I had a friend who had an FA putting them in a lot positions and was actively trading at a rapid rate, I'd be suspicious. If these active trades made it virtually impossible to track performance (which benchmark to use?) it would be harder still to know what was going on. I'd offer suggestions to that friend, things for her to think about. That's what people are doing for IP.

The 1, 3, and 5 year track records of an advisor (or fund) are virtually meaningless unless they are adjusted for risk. And we can't adequately adjust for all real risk, so instead we use "volatility," which is a poor substitute, especially over short timeframes (since volatility is a systematic, not random, source of variation).

But we know this for sure: If anyone could accurately pick winning stocks even a few percentage points better than the market does, that person could become fabulously wealthy in short order by trading options in a highly leveraged way. They wouldn't have to be right "all the time", just a fair percentage better than chance. They'd make a lot more money than taking 1% off the top of some retail clients and making money through hidden fees. But, they don't . . .why? That's the question to ask them and their acolytes.

InParadise: Welcome to the board!

 

[rodi]

This is a fantastic image which you can see here (it's the middle image): Mountain Light Photography: Fine Art Prints | Tibet and China

It was made in 1981 well before photoshop although I guess there are analog ways of doing the same thing.

Sorry for the OT post.

Continuing OT.... My dad was acquainted with Mr Rowell and I recently received from my step mom the framed photos my dad had from that time period. One is the one you linked. I have memories as a kid when Galen Rowell and his wife had dinner at our house. It was a big deal.


Sent from my Xoom using Early Retirement Forum mobile app

 

[target2019]

That still doesn't mean the isn't another institutional class of the fund with very low fees only available to large brokerages for managed accounts. My FA is with USAA and they explained to me that their managed account services with a minimum investment of $500K would have access to these institution versions of their funds with very low fees. I chose not go use them since I enjoy picking individual stocks and didn't like the one percent annual management fee even with the low fund fees, but may consider it one day as I get older. Although USAA doesn't, it's possible her FA eats the fund fees so she only pays the one percent. Institutional fund fees make sense to attract larger accounts. I think everyone needs to cut her some slack. Do you really think institutional fund rates would be available to retail users of Morningstar?

About USAA, their institutional funds have different tickers. So the investor class and institutional class have different e/r's.
As an example, from Morningstar:
USIFX 1.21%
UIIFX 1.01%
The expenses are still too high to be in an index.

Tonight, an MSSB financial guy (was very nice, and bought us a delicious dinner!), explained something similar about "eating" the fees. I posed the question, doesn't his quoted 1% AUM fee exclude the expenses of the fund expenses, and wouldn't someone invested in a particular model be wise to look at the internal fund expenses? His explanation about "eating" the fees was not so clear. If I follow up with a one-on-one, I'll ask again.

 

[clifp]

A couple of thoughts. First of all I do remember inParadise from the TMF days, she isn't a newbie on this stuff and as such I think deserves the benefit of the doubt.

I have patted myself on the back many times, for out performing my moderately aggressive benchmark by 1-2% with lower volatility over 5+ year. But how do I really know this only because Schwab has portfolio analysis tool. I vaguely know how works but I'd be at loss as to how I'd try and prove my performance, to the forum members. There is room in my performance to pay FA fees and still achieve alpha. I think I am better than average investor, maybe even better than the average on the board, but no way am I a top investor. I lack the discipline, and some cases the knowledge to be a top investor, and 'm just too lazy, relying on M* to summarize a company rather the pouring through the 10K except on rare occasions.

God knows we seen enough awful advisers on the board, that have underperformed every possible index, that the law of averages seems to imply that some new person on the board may have the rare FA who actual provides alpha.

I think unlike that vast majority of new members with FA, I think IP actually has the knowledge to accurately judge. "Is my adviser making me money on a risk adjusted basis." So I more inclined to to believe she has actually found the rare good one.

All that said, InParadise the financial side of this board is very data driven, pretty much nothing is taken at face value. If some expert say the SWR is 2.8% or another says you increase the percentage equities in your portfolio as you age. One or more board members will take it upon themselves to dig deeply into the report and try to reproduce, or more commonly point out the questionable assumption they use to support their recommendation. After all many of us are retired we have the time. ...

This extends to other area, not long ago ERD and I collaborated in showing that EPA MPG rating for electric vehicles was BS smoke and mirror. I just bought a Tesla so I wanted to believe I was getting 95 MPG but the data doesn't lie even if government officials do..

Folks like ERD50 provide a very valuable service in crunching numbers. He may seem a bit aggressive in his requests, but I guarantee you if he thinks X is true but the data shows it is Y, he will be the first say I was wrong. I find the peer review feature of the board to be one of the most valuable things..
It seems to me there are three things that can happen if you provide more info.

• Your FA is in fact achieving alpha
• He isn't and he is lying to you.
• It is inconclusive

If you don't think it is worth the effort to figure this out no problem, but we are looking for understanding not condemnation.

 

[Animorph]

I'm pretty sure IP's FA can avoid the front load fees for him, but if he has specified a symbol and share class he is not in some magical institutional fund without fees. IP is paying the ER's in addition to the 1% AUM.

gozer, reported performance is always net of expenses. No need to "take expenses into account." Front or redemption loads are not included and do need to be taken into account.

Looking at M*, it looks like AEGFX did beat M*'s index for the 3 year period, though not the others. Also beat for 10 and 15 years, which I like better. It's a decent fund that M* rates as Gold.

 

[photoguy]

Continuing OT.... My dad was acquainted with Mr Rowell and I recently received from my step mom the framed photos my dad had from that time period. One is the one you linked. I have memories as a kid when Galen Rowell and his wife had dinner at our house. It was a big deal.

Wow that would be a huge treasure. I'm very jealous (both of the photo and having known Rowell).

 

[ChrisC]

Certainly not. But I did help write some of the software behind EDGAR which is used by the SEC to track what we are discussing.

Did the software or EDGAR track privately placed securities? My former employer's 401K plan had a number of privately placed "Trust" Mutual Funds that were essentially carbon copies of the well-known mega publicly traded mutual funds with negotiated expense ratio less than the public funds, no sales charge, no 12b-1 fees, and no redemption fees. I suspect, from what's being reported here, that there are other privately placed securities offered to major accredited investors.

Just asking.

 

[Texas Proud]

To IP.....


Do you have what your return has been the last 3 years and the last 1 year on your invested portfolio

My Vanguard account tells me my returns for all accounts... so posting those might show how good you are doing...

I will spend a bit of time tomorrow looking at the funds you posted and see...


I also believe that these funds are paying your FA.... you should be able to ask...

My biggest concern is the churn.... there is NO reason to keep changing funds at a rapid clip... zip, zero, nada.... funds fall into a class, and the biggest difference in them are the fees... and an S&P fund is and S&P fund... there is not enough diff in them except for the fee.... or it is NOT an S&P fund....



As most people have said.... your comments are outside the norm.... and almost all who have posted more info has been proven wrong... not all, but most... I would be skeptical of someone who said they have beaten the market by 10% for the past 3 and 5 year period... it could have happened, but not likely...

 

[RetireAge50]

I'm just glad it is looking like the funds are legit. Whether they beat the market or not is less important.

 

[gozer]

Did the software or EDGAR track privately placed securities? My former employer's 401K plan had a number of privately placed "Trust" Mutual Funds that were essentially carbon copies of the well-known mega publicly traded mutual funds with negotiated expense ratio less than the public funds, no sales charge, no 12b-1 fees, and no redemption fees. I suspect, from what's being reported here, that there are other privately placed securities offered to major accredited investors.

Just asking.

There are unregistered securities which are not tracked by the SEC. That's the definition of an unregistered security. It involves things that are offered to specific institutions or small numbers of individuals. There are rules that can get you in trouble if you sell unregistered securities to the wrong entities. I don't know all the rules in this space. But it's things like unregistered securities can only be sold to "qualified investors". Qualified in the SEC sense, million dollar net worth or high income. However, I suspect most of the things you are talking about are actually tracked. If they have tickers we can look them up in EDGAR and maybe see.

IP listed ticker symbols that are standard class A retail shares from tracked mutual funds.

 

[gozer]

I'm pretty sure IP's FA can avoid the front load fees for him, but if he has specified a symbol and share class he is not in some magical institutional fund without fees. IP is paying the ER's in addition to the 1% AUM.

gozer, reported performance is always net of expenses. No need to "take expenses into account." Front or redemption loads are not included and do need to be taken into account.

Looking at M*, it looks like AEGFX did beat M*'s index for the 3 year period, though not the others. Also beat for 10 and 15 years, which I like better. It's a decent fund that M* rates as Gold.

Yes, I see that you are correct on how the fees are handled. But since the 1% to the FA is on top of those fees, and not already factored in, then didn't AEGFX actually lose to the index by slightly more than I thought in the 3 year window? But I also like longer term numbers better, it's just that IP said 3 years in an earlier post.

 

[ChrisC]

There are unregistered securities which are not tracked by the SEC. That's the definition of an unregistered security. It involves things that are offered to specific institutions or small numbers of individuals. There are rules that can get you in trouble if you sell unregistered securities to the wrong entities. I don't know all the rules in this space. But it's things like unregistered securities can only be sold to "qualified investors". Qualified in the SEC sense, million dollar net worth or high income. However, I suspect most of the things you are talking about are actually tracked. If they have tickers we can look them up in EDGAR and maybe see.

IP listed ticker symbols that are standard class A retail shares from tracked mutual funds.

You sound like it's a very worrisome thing to have privately placed securities, as if the SEC registration process is a panacea for the safety, soundness of securities registered with the SEC, when the primary focus of the process is the adequacy of investment disclosure and information to prospective investors. Not all institutional or privately placed mutual fund shares have to go to accredited individual investors. They can be placed with pension funds and employer 401K plans. I own T.Rowe Price New Horizons Trust Class A Shares (no ticker symbol) through my former employer's retirement plan but my Class A shares have the same asset holdings as T. Rowe Price New Horizons (PRNHX), but with a lower expense ratio than PRNHX, no sales fees, no 12b-1, no redemption fees, period. If you asked me for a reference point for my holdings in the Class A Shares, I guess I couldn't refer to my "unregistered securities" but would have to refer to PRNHX and this would lead you to believe, I guess, that I'm being saddled with the fees and ER aligned with PRNHX.

If you can find my Class A Shares in EDGAR, let me know.

 

[InParadise]

That still doesn't mean the isn't another institutional class of the fund with very low fees only available to large brokerages for managed accounts. My FA is with USAA and they explained to me that their managed account services with a minimum investment of $500K would have access to these institution versions of their funds with very low fees. I chose not go use them since I enjoy picking individual stocks and didn't like the one percent annual management fee even with the low fund fees, but may consider it one day as I get older. Although USAA doesn't, it's possible her FA eats the fund fees so she only pays the one percent. Institutional fund fees make sense to attract larger accounts. I think everyone needs to cut her some slack. Do you really think institutional fund rates would be available to retail users of Morningstar?

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.

My FA, knowing my history with stocks, has suggested setting up a portion of the account for me to trade, which would have zero stock trading fees and would be outside his 1% which is not imposed on the individual stocks we have kept in our accounts. So why would he suggest transferring some of the assets to outside of his fee base? A happy client remains your client. Not all FAs are equal. MIL's is terrible, charging her 1% even on her money market account, and since he is an independent instead of affiliated with a large group, passes all the fees on to her. But that is another fight I just won't get involved in. Have to pick my battles.

And I love that this young guy has focused on a total family approach. Our kids get the benefit of the FA perks even with their relatively low balances. Eldest at 19 already has a robust Roth account, the growth of which has interested him in continuing to contribute to his Roth even at such a young age. He also has a free checking account with a fee free ATM card, no matter what ATM he uses world wide, at a much higher rate of return than the PNC account he opened because they have an ATM at school. This will come in handy when he does his semester abroad this summer, using the ATMs in Spain. No fee credit cards will be available as well when he starts to work again. These are perks that typically only are provided to those with considerable assets, but the FA realizes that these kids are his next generation of clients, and if he pulls them in now, they will likely stay with him when they too are making good money. No doubt he knows these are perks we value which makes it harder for us to leave, as long as his returns remain as good as they are. His focus on the family, being a trusted adviser to the kids about finances should something happen to us, propagating our vision for these funds after we pass, is something that sets him apart. Smart marketing and while I see through it to why it benefits him as well, I am impressed with his taking that approach.

There are pluses and minuses to everything, and a FA is not for everyone, nor is it necessarily for us at every point in our life. For now, it is working well for us. But frankly we would not have even had enough assets to go with him had I not challenged the mantra of low expenses rule. Net returns rule, and for some that will be achieved by low fees and expenses, for others, not.

 

[InParadise]

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.

IP, some of the stuff you have posted scares the crap out of me. However, your money, your choices. The one thing I would throw out to you is that the ability to manage taxes once you retire becomes hugely important and I would strongly suggest you figure out a way that makes sense to you to get hold of the reins on this one. A massively high churn portfolio like the one you have now will be a disaster once you retire. OTOH, if you are a longer term holder at least in your taxable account you can very judiciously manage tax exposure very simply. I expect to pay about zero federal income tax over the next 5 years even though I will realize significant qualified dividends and long term gains. If your portfolio is constantly churned, it becomes impossible to work the tax code to your advantage. That is a LOT of money to leave on the table.

SNORT! Well Brewer, in the interest of full disclosure, I can be crazy sometimes. Life would get boring otherwise.

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. Having a FA does not equal abdicating all decisions to them. You have to discuss your goals and come up with a way to best meet them together. We meet in person once a year, (some sales commandment IMO about pressing the flesh to make sure your client feels valued,) something we would be happy to do without since we have full access to him via phone and email. 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.

 

[InParadise]

To IP.....


Do you have what your return has been the last 3 years and the last 1 year on your invested portfolio

Yes. But I am not going there. I am not here for you guys to dissect our choices and confirm we are doing what we need to be doing. I feel comfortable with our approach at this time. Thank you for your interest. I will be sure to make it clear if I need analysis of something down the road.

I also don't think providing returns would further the "Is a FA a valid way to go" discussion, since the returns from our FA will not be the same as another.

 

[gozer]

You sound like it's a very worrisome thing to have privately placed securities, as if the SEC registration process is a panacea for the safety, soundness of securities registered with the SEC, when the primary focus of the process is the adequacy of investment disclosure and information to prospective investors. Not all institutional or privately placed mutual fund shares have to go to accredited individual investors. They can be placed with pension funds and employer 401K plans. I own T.Rowe Price New Horizons Trust Class A Shares (no ticker symbol) through my former employer's retirement plan but my Class A shares have the same asset holdings as T. Rowe Price New Horizons (PRNHX), but with a lower expense ratio than PRNHX, no sales fees, no 12b-1, no redemption fees, period. If you asked me for a reference point for my holdings in the Class A Shares, I guess I couldn't refer to my "unregistered securities" but would have to refer to PRNHX and this would lead you to believe, I guess, that I'm being saddled with the fees and ER aligned with PRNHX.

If you can find my Class A Shares in EDGAR, let me know.

Not worried at all, they are just different things. Remember IP indicated that she copied and pasted her information from a screen in her portfolio and then deleted the things from the screen that she didn't want us to see before posting it.

Well, OK, that was a PITA to edit down so that you didn't see all the other info that copied and pasted with, but since you asked so nicely...

Basically, IP said, I bought 9 cars and she gave us the make and model (i.e. the ticker symbol). But we keep trying to say what if it was 9 stealth fighters. Interesting, but off topic.

I have no idea how to find a security like you are describing that is only "like" something else. I'll dig around a bit, but I doubt I'm going to get anywhere. Since I retired a few weeks ago, I only have the same basic access you do off the SEC site. It allows you to find filings for a known entity. But when you do full text searching for "T. Rowe Price New Horizons" you get more than 8000 results. You would need to narrow the info. There are huge numbers of institutional funds filings associated with this fund.

 

[MichaelB]

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.

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.