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I’m sure many Humble Dollar readers have read various iterations of this innumerable times.
I was just reading Adam Grossman’s (soon to be published on the HD website) weekly email where he quotes Warren Buffet as stating, “Performance comes, performance goes. Fees never falter.”
John Bogle’s is famously quoted as saying, “You get what you don’t pay for. Costs matter.”
Yesterday I was speaking with my daughter in law about these famous quotes when urging her to investigate what her 403b fee is. I looked at my Morningstar Portfolio Manager and reported to her that our portfolio expenses are 0.05%.
So how about it HD readers? What is your portfolio expense percentage.
And for those HD readers who have a financial advisor whom they pay an asset under management fee, why do you choose this route?
No judgement here. There are many good reasons to pay an AUM fee. As an example if my cognitive abilities fade we will probably pay such a fee to either Vanguard, or a financial advisor. Despite my best efforts my wife continues to show no interest in the concepts of personal money management.
I just did a bit more analysis of our portfolio after realizing that the real benefit of figuring out our total ER is to identify whether there are places we can cut it back. I also realized that it’s not really accurate to include in the denominator asset values that inherently have no ER. For us this includes things like CDs, iBonds, and individual stocks. I also don’t count the ER of the cash positions held in money market mutual funds at our brokerage because by the time I net off the fund expense fee it ends up paying the same amount of interest as a high yield online savings account (right now 3.9%).
By removing those items from my ER analysis I’m left with only ETFs that attract some sort of ER. That didn’t change the numerator I started with, but it made the denominator smaller, thereby increasing our average ER quite a bit to 0.38%. In terms of dollars, 2/3 of the ER comprises the AUM fee we’re paying to a broker to robo manage part of our portfolio.
The remaining 1/3 of the average ER comes from actual ER fees for the ETF positions. And of those, fully 1/3 comes from a single position our robo advisor put us in that has an ER of 0.36%. That really got my attention, so I did a bit of research on it and found out that a comparable Vangard ETF has an ER of 0.03%. A side by side comparison of their respective performance at various time intervals out to five years tells the tale, though. The high-priced ETF is consistently turning in a 1% better performance on both ups and downs than the Vanguard fund.
Conclusion: in this case it’s worth paying the higher ER for the better performance. AND – it’s worth paying my robo advisor for their insightfulness to put me in the higher fee ETF in the first place – a move I probably wouldn’t have made.
Thank you, again, for asking the question. This prompted me to do a nice year-end checkup and learn something about the total cost of owning and managing what we have.
Five years may not be enough history to justify the higher expenses.
You’re welcome. My purpose with this post was to spur people to look at and analyze their costs. BINGO!
Of course, we all want to have our investment expenses as low as possible. You don’t want to sign up with an advisor (and there are some that have reasonable costs) until you need to. The trick is to be able to recognize the fact that your abilities have slipped. If one’s spouse isn’t interested and you have no child that you can have look over your shoulder to see what you are doing with your investments you have a dilemma. You have to be competent to sign up with an advisor. So, if indeed you are developing dementia will you know and be able to act…..? There is a lot of anecdotal evidence of senior citizens not recognizing how much their abilities have slipped.
Furthermore, disabling medical events can happen suddenly. In April, I spent some time lying on the sidewalk in front of my home while my heart was beating way too slowly. I lived through this event and now have a pacemaker. But, people sometimes die from similar events. My father-in-law had a stroke that left him mobile but unable to communicate as he could no longer read or understand speech.
So, if your spouse isn’t interested or can’t do it don’t you need a plan to have someone step into your shoes in the event that things go South when you don’t expect it? Your plan could include a son or daughter, or a very, very close friend, or an advisor.
After thinking about all of this, in 2023 at age 78 after self-managing our investments for 23 years, with a spouse who couldn’t do it, and very busy children, we signed up with a flat-fee advisor. Basically, the advisor uses index ETFs and their philosophy is quite close to mine. I could still do it myself, but my time on the sidewalk in April just reinforced that my decision to go with an advisor was the right thing to do.
Over my 23 years of self-management we might have saved $800K or more in fees compared to using a 1% firm. At 79, I don’t get on ladders anymore and have to hire someone, for example, to clean my roof and gutters. This, like having an advisor, is just a cost of getting old……
Look at it this way, we are all different. I am my own advisor since 18, now 78. Sure it all worked out for me, and avoiding $20,000 in fees on average is a lot of money over 60 years. I am at Vanguard/Fidelity with very low fees, from 0.03 to 0.20, but that is my choice. Some people need assistance, and sure 1% is a lot of money, but if on their own maybe they would loose a big part of their investment. The key is to find the RIGHT advisor, not an easy task but one you can do. My investing is 75% in index funds at this point, however no bonds, 10% in individual stocks I choose, and 15% in Cash to get over those down years like 2022, worst year in my lifetime of my nest egg. I also do my own taxes for the last 62 years, no tax people needed. I tried two years of tax consultants and they made too many mistakes. My wife will have to rely on my Children if I pass first, she just has no savvy or interest in the market.
Before firing my investment manager I had 1.87% costs (including 1% AUM fee) for an all mutual fund portfolio that consistently performed below the broad market indexes in both good and bad years.
I restructured portfolio from 28 mutual funds (some with expense as high as 2%) to 4 mutual funds and 2 ETFs. After several years of experimentation I now do very little trading. Only 1 of the mutual funds has brokerage trade fees (at Schwab).
Current self-managed portfolio expense is 0.10% with a mixture of mutual funds and ETFs that consistently performs at or a little better than the broad market indexes in both good and bad years.
I try not to think about all the years I let a “professional” do the management.
I realize that some of the above sounds like I am bragging. But frankly, managing a fund-based investment portfolio is just not that difficult.
My 403b has 1% net fees.* The rest has no fees, although there are transaction costs due to the difference between bid and ask prices. For my investments these are generally under .01%. This is because I directly invest in a list of securities, perhaps it’s the Spinella Ramage Industrial Index?!
*I have not rolled it over because I can take a tax-free ministerial housing retirement allowance from it. I thank the lawmakers who saw fit to give clergy a carve out, even though it probably isn’t fair to the rest of you!
This is not either or. There are many alternatives to AUM to obtain the financial advice one needs. Fee-only for example. AUM is a carryover fee structure from the days when financial advisors were mostly investment managers. From a customer standpoint, AUM makes no sense. You pay the same fee regardless of the advise given. Works great for the advisor. For most clients, there is a lot of work initially with a new client, the one is in the maintenance mode until something significant happens. But even then, it is only a tweak to the established plan. AUM MAY only make sense for a client with a very complex financial situation and if the advisor is providing comprehensive service (estate planning, real estate, tax planning, etc.). I would argue that most in the accumulation phase only need a part-time FA, a check up every few years or when a significant life event happens. FA is arguably more necessary during the de-accumulation years. Fee only for the win!
AUM is considered fee-only, as is paying a fixed retainer or by the hour. “Fee-only” is used to distinguish the payment arrangement from those that involve paying commissions on each transaction — the traditional broker and insurance salesperson model.
Average ER for whole portfolio is 0.08%. We pay for robo management of part of our portfolio, which averages around 0.15% across everything. Total ER is 0.22%.
My wife and I each participate in our work offered 403b. At 59.5 years of age we each transferred the majority to our IRA’s in Vanguard.
The 403b has multiple fees:
Plan Administration Record Keeping: .25%.
The Broker Advisor fee : .45%.
Other fees: These fees range from $30 to $200 per event. For example it is $50 for the record keeping company to send me money per event.
And to top it off each fund has an expense ratio that is anywhere from .04 to 1%.
The total fees are .7% plus the expense ratio of the fund… between .74% to 1.7%.
Vanguard fee is minimal .09%
No admin fee.
No broker fee.
No “other” fees.
My year over year savings since the 59.5 yr transfers is well… BIG MONEY.
The portfolio tool on my Vanguard accounts indicate a overall fund expense ratio of 0.07%. I have not included my spouse’s separate accounts and doing so would increase our combined fund account expense ratio to approximately 0.10%.
Apparently we do not pay any fund expenses on my TIPS investments that I buy at auction through Vanguard and which I intend to hold to maturity and those TIPS holdings lowers my overall expense ratio as calculated by Vanguard. Without including our assets in TIPS our expense ratio is higher.
A few thoughts on the topic of investment expenses-
Fund expenses are deducted by my funds before the income is reported or paid so those expenses appear to be effectively pre-tax for taxable, tax deferred and tax free Roth accounts.
Investment expenses related to tax exempt municipal income are not deductible.
Under current tax law in 2024 & 2025 investment management and advice fees paid via AUM or otherwise are after tax and are nondeductible for taxable accounts. If I were paying a AUM fee (I’m not) I would want to be certain the portion of the fee related to tax deferred or tax free accounts (Roth or HSA) were deducted from the appropriate tax deferred or tax free account.
Before the Tax Cut and Jobs Act tax preparers could and did spend a lot of time inputting investment expenses into 1040 returns where the taxpayer got no tax benefit for three reasons – you had to itemize to benefit, your combined miscellaneous itemized deductions had to exceed a floor of 2% of your adjusted gross income(AGI) before any miscellaneous deductions could be deducted assuming you itemized your deductions and, finally, even if you ended up both having deductible miscellaneous itemized deductions above 2% of your AGI and you itemized for regular tax purposes the alternative minimum tax laws(AMT) effectively does not allow certain miscellaneous itemized expenses and schedule A taxes for alternative minimum tax purposes. Fees paid your tax preparer is another example of a miscellaneous deduction that the 2% of AGI rule applies to. Bottom line – the AMT rules can reduce or eliminate the tax benefit from claiming those miscellaneous itemized expenses on your 1040 return.
If you are paying a tax return preparer on an hourly basis you are likely incurring additional preparation fees for work related to those investment expenses. If such investment expenses are incurred by a pass through entity then your preparer’s work expense related to investment expenses are likely incurred more than once.
I continue to expect that managing my income tax expense related to my investment income provides me the best way to maximize my net after tax investment income. I think the fund expenses I incur are nominal compared to the tax savings benefit I get from the decisions I make regarding asset allocation and asset location and keeping the administrative work simple for me, my spouse if I pre-decease her and our heirs.
I pay .05 at Vanguard for index funds and manage my own portfolio. I am a tax preparer for AARP so I handle my own taxes, roth conversions, withdrawals, and asset allocation. I do know many people that would be better off with an advisor, but that is due to emotions, not intelligence.
Many end up with a stack of annuities due to explaining their risk adverse
personality and choice of advisors. “Where is the customer’s yacht”
is a good read to help understand how the advisor system works for some people. Good advisors are out there, but sometimes hard to find.
Our expenses are about 5 basis points as well, ranging from 0 for Treasurys to 75 for a sector ETF (with a small amount invested). Though most of our money is in Vanguard & Fidelity funds.
The reason many use advisors is lack of financial education. The simplicity of index investing is black and white. Anyone paying .5-1% on all assets over ones lifetime is paying over a million dolled do it ars in fees. Read a few good books and be a DIY investor. The real difficult part is controlling your emotions and having an AAmodel you are comfortable with. My philosophy was can I emotionally tolerate a 50% loss in my equities. Read as well Simple Wealth by Nick Murray; it might convince you a 100% equity portfolio in accumulation phase of your career is quite appropriate. The permanent trend in equities is UP!!!!
My percentage is 0%, because I select my own stocks and invest at Fidelity where there are $0 commissions. I do pay about 30 basis points on uninvested funds, but you have to let them make money somehow.
Here’s another one:
Costs are forever … Alpha is fleeting
It’s from an NBER study that showed that balanced mutual funds underperform market-index benchmarks by an amount just equal to their cost, on average.
Our portfolio expenses are 0.16%. We don’t use an advisor but I can see the value a good one can provide. As stated below, personal finance is much more than choosing investments. I can also see why some would find the AUM approach works better for them than a fee only advisor. I think some clients can also benefit from an unemotional steady hand as much as a subject matter expert.
403b’s are infamous for having high fee investment options. Here’s a website that helped my son find the lowest fee investment option in his 403b: https://403bwise.org/
I’m betting no one else is going to cite the same reason as mine for paying an advisor.
I used to have a securities license but didn’t like the job, and left it behind when I opened my tax prep office. Upon leaving I transferred the management of my IRA to Dustin, a young but promising advisor. Then Dustin started referring his clients to me for tax preparation. Those referrals eventually made up nearly a third of my practice.
Only about 20% of our assets are with Dustin, and given the contribution he made to my success, I just won’t pull my investments.
His fee is .5
Like Rick and you, all of our fees are at Vanguard broad index prices. I also agree with him that some folks are better off not doing it themselves. A conversation with a friend led to him showing me his Rollover IRA numbers. Between the fund fees and management expenses, he was paying around 3%. I showed him the probable impact of that figure on his future earnings and he saw the wisdom of moving to Vanguard. He’s a smart man, but not tuned into finances, so it’s also wise for him to pay for the Vanguard advisor services.
Jonathan has a great article in his Guide here: https://humbledollar.com/money-guide/why-costs-matter/
David, thanks for an interesting question. We use Vanguard broad index and our fees are similar to yours.
I have not used a financial advisor but I know many people who do, and am friends with a very successful advisor. Many of the people I know who use an advisor are not comfortable with personal financial planning topics and do very well with an imposed plan. In their cases they are better off with an advisor, even paying a 1% fee. I’ve always believed that a good plan, faithfully followed, is better than no plan. Another important point is that many folks I’ve observed (including many engineers), think that financial planning begins and ends with investing, and ignore taxes, insurance, and estates. A good holistic advisor covers all these topics.
Have you ever figured out how much a 1% AUM fee costs over, say, twenty years? On a million dollar portfolio a 1% fee is $10,000. Over twenty years you would pay hundreds of thousands of dollars plus foregone compounding. No advisor is worth that kind of money.
A simple two or three fund portfolio requires minimal maintenance and can be had for next to nothing. Vanguard will organize your RMDs if you like, and you can rebalance once a year.
Good point. I’ve often thought that the consequences of paying an annual AUM fee aren’t sufficiently appreciated.
Using your example, a $10,000 AUM fee paid from your portfolio means that the $10,000 is no longer compounding in your favor. Assuming an average annual return of 5%, that $10,000 would grow to $26,533 in twenty years. But that money is in your advisor’s pocket, not yours—a huge opportunity cost.
Making matters worse, that 1% AUM fee is removed from your portfolio every year.
Kathy, you are preaching to the choir. There is no doubt many more people could do their own planning. But for some reason they choose not to, and many I’ve seen never start. As much as it might cost them, they may never have executed a plan without an advisor. And many would make damaging knee-jerk reactions to bad news. I’ve seen this happen, and I try to provide calming wisdom, but some folks don’t want to hear it.
“Another important point is that many folks I’ve observed …think that financial planning begins and ends with investing, and ignore taxes, insurance, and estates. A good holistic advisor covers all these topics.”
This is what I was discussing with my daughter in law. I advised her that she and my son should hire a fee only advisor as their combined income is nearly 2X what ours was at our peak earnings years. We were talking about where to invest her retirement dollars in order to reduce her taxes.
I explained to her that their income level far exceeds what I was reading and studying when we were in our retirement accumulation phase.