Why are Investment Management Fees so High?

One of our gripes about our own industry is high investment management fees and the fact that many consumers of investment services really have no idea what they are paying. One new client had two accounts under the same name at his old advisor’s shop. He told us that he didn’t really understand why the old manager wanted to split the account. We were worried that there was some estate planning reason for this split, but when we looked at his old statements we saw he was paying over 2% in investment management fees per year on one of those accounts. At once, we saw that he had been “sold” on a separately managed account, where he pays an overseer as well as a manager. Fees for these types of accounts can approach 3% per year.

Any time your manager uses mutual funds, you are very likely paying two fees: one to the manager, and one to the mutual fund. This can ramp fees into the stratosphere. Most investors don’t understand the hidden mutual fund fee is on top of the cash they pay out to the overseer. And if you pay commissions, ask for an annual commission summary. You might be shocked at the bottom line, and that won’t even reveal all your costs, because every trade costs money other than commission charges.

Here’s how high fees hurt: If you start with $100,000 and you pay a fee of 1% per year, and your account grows by 7% a year, you will have roughly $177,900 at the end of ten years. If you pay 2% per year, though, you’ll have only $160,700. That missing $17,000 would buy a lot of dinners out!

In the ultimate solution, one could eschew advice, buy index funds, and retain a lot more return – IF you know how to do the right things when you navigate through crashes like ’08-’09, and retirement withdrawal planning, and financial emergencies like replacing a roof or funding a grandchild’s surgery. If you can’t keep your portfolio constructed rationally through these events, it makes sense to pay for a little help. But more than 1% borders on unnecessary. If you’re paying that, better do some comparison shopping! And if you have a lot of money under management – several million – a flat fee should be on the table as an option. Flat fees can prevent you from paying ever more as the market rises which is not something your manager controls, after all.