Earlier this week, I mentioned a short list of common errors many investors make, and cobbled together a top 10. Readers had a number of very astute and specific suggestions.

For my list, I wanted to keep it as broad as possible

During each of the next 10 days, I want to flesh out these ideas in some more detail. While I am traveling, I will post one per day in no particular order, starting with today.

The first error we are going to look at are high fees.

You can define fees in a variety of ways, but to me, its any non-investment spending relative to your portfolio that detracts from long term performance.

These can include:

-Mutual Fund Loads
-Advisor fees
-Commissions
-Management fees
-12b-1 fees
-Performance fees

The bottom line is simply this: High fees cut into your returns. Every academic and industry study that has ever looked at this issue has determined that fees are an enormous drag on long-term performance. Typical mutual fund or advisor fees of 2-3% may not sound like a lot, but compound it over 30 or 40 years and it adds up to an enormous sum of money.

One Morningstar study found that while 10% of mutual fund managers regularly outperformed their benchmark, net after fees that number dropped to 1%.

The hedge fund fee structure of 2% plus 20% of the profits is even more of a drag on returns. Other than a handful of superstar managers (that you likely don’t have access to), the vast majority of hedge funds simple cannot justify their costs. Speaking anecdotally, my experience has found that to be true for most of the retail stock brokers and for many of the investment advisors that work on Wall Street.

Its as true for investment advice as it is anywhere else, the wealthy get a better deal. Fees typically drop significantly on accounts over $1m, then even more over $5m and $10m dollars.

Sub $500k accounts pay the highest fees as a percentage of dollar invested. I have a few ideas I want to put into place in the coming quarters to lower these fees appreciably, especially for the accounts under $500k and $100k. I don’t believe these accounts typically get especially good service or performance, and I have a few strong ideas about how to change that structure.

Across all of my managed asset clients, my goal is to keep fees down at an average of ~1% or less. (it is not an easy target). Investors should expect to pay a little more for smaller portfolios, and somewhat less for much bigger portfolios.

What fees are you paying?

 

 

Top 10 Investor Errors
1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Mutual Fund vs ETFs
5. Asset Allocation Matters More than Stock Picking
6. Passive vs Active Management
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For

Category: Apprenticed Investor, Investing, Rules

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

30 Responses to “Top 10 Investor Errors: Excess Fees”

  1. Orange14 says:

    In my taxable accounts, I pay no advisory fees other than the fee for the bond mutual fund that I’m in. All the equities are in individual stocks which I research myself. My IRA account is in low cost mutual funds, both equity and fixed income – no load funds with small management fees. My taxable equity portfolio has done better than the S&P over the past six years (I wasn’t as vigilant about tracking it before then) so I’m pretty satisfied.

  2. scottinnj says:

    Vanguard Admiral Funds. These funds have less than 10bp of fees. Only advice I paid for was some estate planning services as that is truly an atea where a little knowledge is a dangerous thing.

  3. rd says:

    No advisor fees.

    401k – Wells Fargo Advisor Dow Jones Target Date 2020 – 0.5%
    ESOP – none outside of corporate costs
    Rollover IRA – mix of MFs, ETFs, and some cash – 0.4% avg
    Spouse’s 401k – Vanguard Target Date 2030 – 0.18%

    Somebody needs to show me something special for me to consider an investment product with expenses over 0.75%.

  4. louiswi says:

    I pay exactly 1% to a guy named Guido. Seriously. He does pretty okay by the way.

  5. deanscamaro says:

    ……but compound it over 30 or 40 years and it adds up to an enormous sum of money……

    All I hear on the blog is it is bad to buy and hold. And yet, you use a 30 to 40 year time period as a measurement of failure in mutual funds. Who holds for that time period?

  6. mbreuter says:

    Small, self-directed , getting a defined benefit pension,have never owned a mutual fund, and get 100 free trades/year in both a taxable and Roth account. Prefer US blue chips, ETFs for bonds,(knowing they’re not perfect,) and foreign and emerging markets, (both in cash at the moment.) REITs exposure in closed end funds RQI and IGR- I think paying higher fees for professional real estate guys makes sense. David Swenson’s asset allocations in Uncommon Success was a useful starting point, as well as a complete demolishing of the use of mutual funds. Also trade 10% of my portfolio- keeps it interesting, reading the 52 week low list increases my scope, and its easier to be patient with the investment side of the portfolio. Trading is supposed to be a mug’s game in the long run,but it has funded a good financial library come what may.

  7. bear_tracks says:

    To answer deanscamaro: Although few investors may hang onto an investment for 30-40 years, I think most will end up remaining invested in one or another for that long. Someone that switches funds once a year for thirty years would still be paying the fees over the that time period.

    To answer Barry: I pay at most 0.5% round trip from a discount broker. With an average holding period of maybe six months, that would come out to 1% or less.

  8. InterestedObserver says:

    Let’s see, the range is 0.04 to just under 0.5%. Asset weighted average is about 0.24%

  9. mathman says:

    i spend too many dollars on taxes that i don’t value (since the money is misspent) to agree with the QOTD. Just sayin’ . . .

  10. Deborah says:

    I am currently not vested; no time to do proper research, but I was paying $10 a transaction. That price was very good in that if I made a quick buy decision, and with further research decided it was a poor decision, the fees were not an impedement to decision making. There is a feeling of need to get back what an investment cost. My husband had $30 per transaction fee and it completely changed decisions and made mistakes costly.

  11. Deborah says:

    I really did not care about what percent was fees, just that my NET gain was above market performance. I have beaten inflation and the market so I met my goals.

  12. mathman says:

    Hey, Occupy made a documentary:
    (c/o Suburban Guerilla)

    http://susiemadrak.com/category/occupywallstreet/

  13. [...] To start July, we are introducing a series looking at common investor errors. This is the part two of ten. Yesterday, we looked at the impact of excess fees on performance. [...]

  14. willid3 says:

    mathman, not sure what taxes had to do with this. unless you equate fees with taxes. which you might could do. its taxes that a company levies on its customers

  15. mbreuter says:

    Fees are part of what Warren Buffett calls “frictional costs.” It’s harder to quantify, but from a compounding stand point, I would think the tax advantages that ETFs have over mutual funds would have as great an effect on total returns as the lower fees.

  16. end game says:

    The average fee charged by large Wall Street firms is about 0.83%, ranging from 30 basis points to 1.50%. For the past 1 1/2 years, I’ve tracked this data from news stories on FundFire, which divulges both revenues and assets for brokers switching firms. These fees do not include the fees and expenses for mutual funds, ETFs, and money managers that the brokers invest in for their clients. I charge an average of 0.43% and my minimum account size is $10 million. All-in, I can get a client with $25 million down to 78 basis points. BR is absolutely right that investors with $500,000 or less generally pay excessive fees; I firmly believe, based on many conversations and competitive bidding situations, that most investors with $10 million pay excessive fees. To get fees down below 1 percent for $500,000 or less is a real service if you are including asset allocation and rebalancing. Of course, investors who understand asset allocation could get a global portfolio of bonds and stocks by buying just five ETFs for about 15 basis points, which is ideal.

  17. [...] far, we have looked at Excess Fees, and Reaching for Yield. Today we are going to ever so briefly look at mistake number three — [...]

  18. Iamthe50percent says:

    No adviser fees other than my subscription to Morningstar premium. In my IRA the largest mutual fund is Vanguard Wellesley Income at 0.25% according to Morningstar. The other mutual fund is Fidelity New Market, which I have found to be a reliable long-term income producer, fees 0.86%. A fourth of the IRA is cash, earning zero. The balance is in various income producing stocks, ATT, Astra-Zeneca, Royal Dutch Shell, Volkswagen, their share values wobble violently, but the income streams are steady. My 401K is actually the government’s TSP in which only extremely low cost mutual funds are available, all of mine is in the “G” fund of 3% guaranteed government bonds. Every time I venture out of G fund, my head gets chopped off. I’m 66 years old and still working (until the Republicans shut the Postal Service down) but this is basically a retirement potfolio, although I made the highest returns ever last year day-trading GLD and SLV ETF’s following your 50-day EMA rule.

  19. CANDollar says:

    $500K accounts shouldn’t pay more than 30BP in fees. How? Index ETFs for equity correlated and some bond exposure. CDs and GICs for the rest of fixed income. A couple of hours a year talking to an advisor who charges by the hour and who maybe does the rebalancing.
    If you are paying more than 30BP unless the service is exceptional and has other value features, you would be harming long term returns relative to what you get by exposing yourself to risk markets through index ETFs only.

    All that matters is your asset allocation and rebalancing for most of your long term return.

  20. Scott says:

    Barry, thank you for this. It is a valuable public service.

    I’m still a bit confused though. My advisor charges me 1% for his fees, but then I also pay the management fees on the ETFs that are in my portfolio. The portfolio is 100% ETFs. My “all in” fees are about 1.3% on a 700k portfolio.

    You say that you try to charge around 1%. Does that include the costs of the ETFs that you use in the portfolio?

    You define fees as “any non-investment spending relative to your portfolio that detracts from long term performance” and I’m just not sure if “investment spending” includes the costs of the ETFs or not.

    Thanks again for your help.

  21. [...] ongoing series of common investor errors continues. We have looked at Excess Fees, Reaching for Yield. and Behavioral [...]

  22. [...] Top 10 Investor Errors 1. Excess Fees 2. Reaching for Yield 3. You Are Your Own Worst Enemy 4. Asset Allocation vs Stock Picking 5. [...]

  23. [...] Top 10 Investor Errors 1. Excess Fees 2. Reaching for Yield 3. You Are Your Own Worst Enemy 4. Asset Allocation vs Stock Picking 5. [...]

  24. [...] Previously: 1. Excess Fees 2. Reaching for Yield 3. You Are Your Own Worst Enemy 4. Asset Allocation vs Stock Picking 5. [...]

  25. [...] Previously: 1. Excess Fees 2. Reaching for Yield 3. You Are Your Own Worst Enemy 4. Asset Allocation vs Stock Picking 5. [...]

  26. [...] Previously: 1. Excess Fees 2. Reaching for Yield 3. You Are Your Own Worst Enemy 4. Asset Allocation vs Stock Picking 5. [...]

  27. rawein says:

    How can I tell if fees are good? We’re billed 1% per year, billed quarterly. BUT at the end of each quarter, accounts are billed 1/4 percent of the balance at the end of the quarter. Is that standard practice?

  28. [...] 2012, 10:30AM Here are each of the expanded points from the top 10 errors investors make: 1. Excess Fees 2. Reaching for Yield 3. You Are Your Own Worst Enemy 4. Asset Allocation vs Stock Picking 5. [...]