What is the hourly rate you are paying your adviser?

Have you ever thought how much your adviser is earning on an hourly basis?

Most investors never think about this because they never write a check. The fee is conveniently deducted from their account.

So lets do some simple calculations to see what you are paying:

Lets say you have $500,000 that you have invested through a bank or with an advisory firm. The fees will generally be about of 1%  of your assets whether the adviser is guiding you in stocks, bonds or mutual funds. You will also be charged fees inside the mutual fund (I wont factor that in). If you invest in mutual funds you may also pay a initial charge of up to 5%.

Lets assume the bank or adviser places you in loaded funds at a 5% charge, you will pay $25,000 off the top.
And,
Then add the $5000/year in fees (1% x $500,000)

Next, lets also assume you keep your money in place for 10 years. You will easily average $7,500/year in fees.

Now lets say your adviser spends 20 hours a year completely focused on your account (meet 2 times/year for 2 hours each time + 4 hours of preparation + 6 hours of additional calls etc during year)

You are paying that adviser/bank $375 per HOUR for advice. If you are investing in mutual funds there could be an extra 1% or more charged for the management of the mutual funds.
If you had $1,000,000, your hourly rate could be $750/hour assuming 20 hours/year of service.
This is interesting: is the adviser spending any more time on your account because you have twice the $500,000?
Many will have a declining fee schedule, but not until the fees on the first million are earned.

Are you getting $375/hour of value?
Is your adviser directing you to consistent market beating performance?

If not, you may want to consider negotiating a lower rate or paying on an hourly rate.

If your adviser is consistently beating the market for you on a risk adjusted basis and net of fees please share, I would like to invest with this person.
In fact, I don't know if this adviser exists at all.

Fees Matter - reading this article could be worth six figures to you!

Recently I met with a couple of clients who had rolled pension money from an old employer to a bank IRA.
In both cases the bank placed the client in mutual funds with 5% loads and  and annual fees that averaged 1.30%. Also, in the cases I am referring to, the mutual funds have historically under performed their benchmarks.


People will often give their hard earned retirement to a bank or Wall St firm in the belief that they are doing the prudent thing with their money.

How fees can effect your investment returns:  Lets take a 40 year old investor with $100,000 to invest and who plans to save another $5,000/year for the next 25 years. Below are 3 scenarios seen in the industry:

1. A local advisory firm charges a 1% advisory fee to "actively" manage the money. If the adviser chooses mutual funds there can be a 5% initial charge (load) plus fees of 1.30% within the mutual funds

2. A bank investment department that has no advisory fee but collects a load of 5% for recommended mutual funds. In addition, there are the 1.30% ongoing mutual fund fees

3. An adviser who believes in passive investing (buying and holding a portfolio of index funds). The adviser charges .25%/year and the index fund fees average .20%. This adviser’s fees are lower because they don't have to research mutual funds and move Joe from fund to fund when a fund underperforms or changes managers.

Next,

We know, from many study’s, that there is not a system to choose mutual funds or stocks that consistently outperforms the market. In fact, over time, the vast majority of mutual funds and stock pickers have long term returns that equal the averages (or the index return). Therefore, in the table below, we can only assume all 3 scenarios earn the same return.

The differences in the long term dollar values can be staggering. A review of the table below shows that by passively investing an investor can be almost $300,000 ahead of the other options.

  

	Fee based advisor charging 1% + mutual fund fees of 1.00%	"Free" advisor - typically banks and advisors at brokerage houses	Fee only advisor who charges .25% and invests in low cost index funds with .25% fee
Initial amount	$100,000	$100,000	$100,000
annual addition	$5,000	$5,000	$5,000
up front load	5.00%	5.00%	0.00%
annual fees	2.30%	1.30%	0.45%
yrs to maturity	25	25	25
Est portfolio return	8.00%	8.00%	8.00%
$ amount earned	$682,829.04	$834,201.30	$959,325.55

We all want the secret to investing. The secret is keeping fees low. A recent study by Morningstar found that the best predictor of mutual fund performance was fund fees.  

“[When deciding on a fund], the first thing to look at is the expense ratio; the second thing is the turnover rate; the third thing is some measure of past performance… But if you had to look at one thing only, I’d pick expense ratio.”

William Sharpe, 1990 Nobel Laureate in Economics

Here is  a quote from Morningstar:

“All things being equal, funds with high costs are much more likely to produce poor performance because of their cost disadvantage.”

Russel Kinnel, Morningstar, Inc.

If you are interested in learning more about passively investing your money, feel free to email me at mcangelucci@gmail.com