March 24, 2014

A Better Price

A Better Plan  |  A Better Portfolio  |  A Better Price

Cost control is a critically important component of investment success. Many advisors understand this and wisely recommend the use of low-cost index funds. However, many of these same advisors haven’t looked in the mirror lately: they harp on the exorbitant fees charged by the mutual fund industry, but somehow always find a way to justify their own exorbitant advisory fees.

feesAt Planvesting, we believe strongly that fees matter; that AUM fees penalize investors, especially affluent investors; and that most advisors’ portfolio management fees are outrageously high relative to the level of effort involved (and benefits provided).  Once you understand the benefits of evidence-based investment management, you realize that there can be absolutely no justification for the high AUM fees charged by most financial advisors.

Consider, for example, two investors; Client One has a $500,000 portfolio and Client Two has a $1,000,000 portfolio. Each is being managed by the same advisor who charges the typical 1% of Assets Under Management. In other words, Client One is paying $5,000 per year and Client Two is paying $10,000 per year. The question, of course, is: “What does Client Two get for paying twice as much as Client One?”. And the answer is: “Probably Nothing”. In most cases, and assuming the same number of accounts, it takes little-to-no additional effort to manage a $1,000,000 portfolio than it does to manage a $500,000 portfolio. Both are probably invested in similar asset classes, both are probably rebalanced based on the same rules, and both probably get the same level of portfolio-related advisor attention. Simply stated, in most cases the size of a portfolio has only a minor (if any) impact on the level of effort required to manage it.

That’s why Planvesting’s portfolio management fees are both fixed and among the lowest in the industry. We view our services as those of expert consultants and charge accordingly, based approximately on the amount of time required to manage a portfolio. In addition, we have extremely low overhead – there is no “house” account taking 1/2 of our revenues to pay unnecessary administrative and marketing expenses. Our fees generally range from about $2,000 to $4,000 per year, regardless of account size, and no services are excluded (see our service offerings here).

Since we’ve found that “level of effort / service time requirements” are often related to the number of accounts under management, a rough guide for our annual fee is $1,500 plus $500 per account under management. So, using this guide, the annual fee for a $3,000,000 portfolio comprised of 3 accounts would be $3,000 (about 10 basis points).