What investment fees are fair, and what’s unfair?

Larry McDonald wrote up an interesting post about Nora Dunn, a woman travelling the world, but using financial planners at Investor’s Group.

Interestingly, she got hammered by readers suggesting that she was paying far too much in fees. … read more

But what kind of fee structure is fair? A friend of mine emailed me recently to tell me about her fee structure. She just signed up with an advisor charging 1.28% annually, and he’s buying her equities, as far as I can understand. Her advisor, apparently, isn’t a fan of mutual funds.

That made me a little uncomfortable, because I wasn’t sure if that was a fair fee structure or not.

Sure, you can pay a lot more than that for an account in the quarter of a million dollar range (which I believe her account size to be) but doing the math, her costs could also be considered pretty steep.

If the markets make 5% annually over the next five years, and if she loses 3% to inflation and 1.28% in fees, then she’s left with a gain of just 0.72% annually. More than 80% of her profits would be wiped out by fees and inflation.

I know that Robert, at RW Investment Strategies http://www.rwinvestmentstrategies.com/background.html charges 0.4% annually. To put the power of Eugene Fama’s indexing strategies behind you, you could use Assetbuilder http://assetbuilder.com/investing/assetbuilder_fees.aspx and pay 0.43% annually—without having to worry about a local stock picker making your investment decisions.

And I know of another advisor who charges 1% annually, buys indexes and equities, but only charges that fee when the account growth exceeds 4% in a given year. Otherwise, he charges nothing. He also carries any losses forward.

What’s fair? Is my friend paying too much?

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Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I'm happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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11 Responses

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  2. DIY Investor says:

    Well … you know my view. The data tells me that over the long term she is reaching in the bowl and trying to pick the 1 or 2 black marbles mixed in with 8 red marbles. I suggest she pin down her advisor on what the asset allocation strategy is and then duplicate that strategy with etfs. After 5 years she can present her results and argue that he hasn't added value (if that's the case) and maybe save a quarter's worth of fees.

    Maybe her advisor is the 1 or 2 that outperforms – who knows. I just have to say that there have been a lot of really smart people get taken down by Mr. Market.

    To me buying stocks and charging 1.28% is better than charging the same and buying funds.

  3. @DIY Investor

    Robert, after contacting her advisor myself, via email, he suggested that he buys a blend of ETFs–and some stocks. But in Canada, some of our ETFs can be pretty steeply priced. And you don't have to buy a foreign ETF to pay a high price. The high dividend yielding Canadian stock market ETF, with the ticker symbol XDV.to charges 0.55% annually. I guess it's a double-edge sword. If he buys her ETFs, she's paying a fee upon a fee, and guaranteed to lose at least 1.6% annually to the market. If her advisor buys her equities, he has to beat the indexes by 1.28% just to break even. But then I suppose he has to pick out those black marbles.

  4. Mich @BTI says:

    I think the public at large will remain a fertile ground for exploitation when it comes to fees. Many will just turn trust a "professional" with their investments because they don't have the time and because the industry makes sure through advertisements that a warm fuzzy feeling of "we take good care of your money" prevails. I can almost say it's a losing battle Andrew, I can see realtors taking a hit with a DIY crowd because the fee is so obvious but not financial advisors anytime soon!

  5. Gareth Barlow says:

    Andrew, you may have seen this before but if not, thought you might like it. I'm not too sure what they're like as a financial institution but their commercials seem to be on the TV quite a lot. Either way, the commercial gives a simplified opinion of much that's been discussed on your blog recently:


  6. DIY Investor says:

    @Gareth Barlow

    I love those commercials. I'd like to see Ally Bank get some wealth management services and run the same commercials!

  7. @Gareth Barlow

    That's a great ad Gareth. It makes me smile, though, thinking of what Ally bank charges. They might have the biggest laugh of all. I read an article on the promise of index funds in Singapore…save your money…all that rhetoric. And the offering institution was charging 1.04% annually, and charging a sales fee of 2%, just for a S&P 500 index that can be bought here via an ETF, for 0.09% annually. It's all marketing, I suppose. Thanks for attaching that ad. It was pretty funny.

  8. @Mich @BTI

    I think you're right Mitch. I don't know who said it (it might have been you, Robert or Mark) but one of you said that people are mathematically challenged.

    Here are two scenarios with the two popular financial service companies that cater to employees at Singapore American School.

    1. Charge 5.75% sales fee and buy actively managed funds charging 1.2%

    2. Charge no sales fee, and 1.75% on assets each year as an advisor's fee, plus buying actively managed mutual funds charging 1.5%.

    The number "5.75" is the biggest number, so many people think that scenario 1 is more expensive. But over time, it isn't. Although neither scenario would win the respective advisors a nobel prize in ethics.

  9. DIY Investor says:

    @Mich @BTI

    I waffle back and forth on the ""…its a losing battle" view. I take the view of the guy throwing the beached starfish back in the ocean when confronted by the observation that it really doesn't matter. As he responds, "It matters to them". From a broader perspective it might not amount to a hill of beans.

    Still there is legislation in the U.S. requiring transparency in 401k fees and there is a lot of publicity about zero commission ETFs that will bring low fee ETFs to investor's attention. Also, there are many people with books coming out on how people get ripped off by high fees not to mention blogs like this one educating people.

    So, maybe over the long run we can be more positive.

    I have to say I am on the fence about zero commission ETFs because they also encourage short term trading.

  10. DIY Investor says:

    @DIY Investor

    I hope you guys read that 3rd to the last sentence the right way!

  11. Hey Andrew,

    Agreed, double-edged sword, like you said "If he buys her ETFs, she’s paying a fee upon a fee, and guaranteed to lose at least 1.6% annually to the market. If her advisor buys her equities, he has to beat the indexes by 1.28% just to break even."

    Actually, I think that's not too bad – the advisor you know who charges 1% annually, but ONLY charges that fee when the account growth exceeds 4% in a given year. Otherwise, he charges nothing. As long as the financial industry is greedy when others are fearful (when was it not), you'll never see that trend go mainstream.

    I would be interested in more stories about your friend, how her investing makeover is going. Seems like you're really getting her on the right path.

    Also, any update on the worst stocks vs. best funds contest? I'm only bugging you about it because I love the contest – excellent concept.

    Keep up the great work on your blog!



  12. @Financial Cents

    Thanks Mark,

    I have to get off my rear and post about that "loser stock" concept soon. I've been a bit lazy because I haven't found a way to easily paste the portfolio from smartmoney's portfolio tracker. I have to drive a manual transmission a bit (at least I think I do). And I would like to post the entire portfolio–with every holding. It's coming up soon. Thanks for the push! It is a really fun concept.

    As for my friend, I don't think I've been able to convince her to change her investment approach. But over time, I hope to. Most people eventually see that it's not rocket science.

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