MAKING SENSENEXT AVENUE -- January 11, 2013 at 12:00 PM ET
Are You Getting Ripped Off by Money Management Fees?
Photo by Cultura/yellowdog via Getty Images.
Paul Solman frequently answers questions from the NewsHour audience on business and economic news on his Making Sen$e page. Friday's comes from a reader at Next Avenue. The NewsHour has partnered with Next Avenue, a new PBS website that offers articles, blogs and other critical information for adults over 50.
Maureen Clark: I am a retired single registered nurse, 69, and have invested in a traditional IRA and mutual funds, managed by a large financial planning firm. Recently I learned that since my portfolio has fallen to less than $500,000, I would be incurring special management fees. This firm collects its fees based on a percent of my holdings, currently 1.5 to 1.7 percent (plus other fees difficult to calculate), to manage funds that are already being managed by other fund managers. Do you think I could do as well by working with a low fee mutual fund directly (Vanguard or Fidelity) and using their basic "formula" to diversify? I had consulted an independent financial advisor but found myself convinced to purchase an annuity, which was very costly to get out of. Besides a very small pension and Social Security, this "nest egg" and a paid-off home is all I have to last the next 20 or 30 years.
Paul Solman: I feel passionate about this issue so let me be as blunt as possible. I think most money management firms are parasites who live handsomely off innocent investors by marketing that both frightens and reassures. I don't mean they're pulling a scam; most money managers are, I'm certain, hard-working and well-meaning. But how can you argue with the obvious: money management firms pretty much are the market. Therefore, by definition, half of them must be worse than average when it comes to investing money.
You remember the punchline to the old joke, What do you call the person who finished last in medical school?
Substitute "money manager," and you get my point.
Moreoever, Maureen, who are you, or even I, to know which managers are in the better half before we commit our money to them? Surely not on the basis of past performance, so famously deficient as a guide to future results. See this Making Sen$e post from September, where I explain in somewhat greater detail.
Now you describe your money manager as a "financial planning firm." Does it help you with taxes? Other financial matters? Has it been there to help you budget? If so, please ignore my cynicism above. But if not, what are you paying for? And by the way 1.5 to 1.7 percent is a huge management fee. Anything over 1 percent is extravagant these days, unless some extraordinary services are being provided.
You do see the problem, right? These people are paid on commission. The more of your money they can cajole you into entrusting to them, the more money they make. Period.
For any of us non-professional investors, the mantra is simple: Minimize management fees! And how to do that? Invest in the very same funds you do now, but eliminate the middle man.
So in my view your question is in fact the answer, Maureen: "work with a low fee mutual fund directly (Vanguard or Fidelity) and using their basic formula to diversify." I couldn't have put it better myself. Just make sure to compare the fees so you are investing in the lowest cost funds.