He’s Down! Let’s Kick Him!
One of my silly pleasures in life has been to surprise people with how little it actually costs to have your portfolio professionally managed, and custom-tailored by our firm… especially versus a mutual fund.
I present a listing of average expenses paid by mutual fund investors and then ask my prospective clients to propose a reasonable fee for our firm to charge them. They might want to consider that their portfolio will be custom built and managed with their personal objectives in mind… not to mention all of the retirement planning, goal-setting and progress-check sessions that we will complete over the years.
If we’re all being reasonable, I am almost without fail presented with a suggested management charge by the prospective client that is higher than our published rate schedule.
Mutual funds (for a whole raft of reasons) have built in disadvantages to all but the smallest of investors. But, one of the most obvious disadvantages is that they are fairly expensive to buy and hold for the long term. They get away with it because they don’t send an invoice to you that you have to pay… they just sneak it out of your net asset value.
Another disadvantage is the actual fee structure and the fixed cost portion of the internal fees causes something even stranger to happen… the more money you lose, the higher percentage fees that you get charged.
Click to enlarge
If you look at the chart, you’ll see some percentages charged by AllianceBernstein last year and the expected charges coming up in this year. They’ve all gone up because of the dramatic loss of market value that they’ve all experienced.
Oh… and if you want to know total expenses that they’ll be charging, you have to take the portfolio turnover times 0.5% and add this to the published rates… these are trading cost averages. The average portfolio here turns over once (100%), so add 0.5% to the numbers for 2009 to find out how much you would be paying in total every year. In these cases, it’s roughly about 1.88% to 2.25% every year.
Oh… and don’t forget to add in the 4.25% commission that you would have to pay your “advisor” just to get in.
It’s important to know that it’s not just AllianceBernstein, it is all mutual funds to varying degrees… This example is just the latest that popped onto my radar recently and I felt like writing about this topic today.
Kick you down, beat you up, then kick you again. “Thank you sir! May I have another?”
