I recieved the following email this morning from an AFM reader:
I am 32 yrs old, married with one child. I am starting a new job and need to rollover my 401k. I currently have 160k in the account and have worked with a financial planner for a couple years. Can you please review his suggestions (I’m concerned about the fees of the funds). Thank you for your time.
Large Cap Value
Van Kampen Equity & Income Fund – $14,000
Lord Abbett Affiliated Fund – $8,000
Davis New York Venture Fund – $18,000
MFS Value Fund – $18,000
Large Cap Growth
Fidelity Advisor New Insights Fund – $20,000
Hartford Capital Appreciation Fund – $20,000
Fidelity Advisor Leveraged Company Stock Fund – $10,000
Fidelity Advisor Value Fund – $8,000
Fidelity Advisor Mid Cap II Fund – $8,000
First Eagle Global Fund – $10,000
Franklin Templeton Mutual Discovery Fund – $18,000
Fidelity Advisor Diversified International Fund – $9,000
After a follow-up email with this reader, I found out that his advisor uses the “C” share class. A “C” share does not charge a front load but charges a 1% annual fee (called a 12b-1 fee) to compensate the advisor. This class also typically charges a redemption fee if the shares are sold in the first year (sometimes longer).
Though “C” shares are more expensive to own over the long-term, I like them better than “A” and “B” shares because they at least put the advisor and the investor on the same side of the table.
I put together a table to show the fees associated with each fund and the total portfolio. Here is what I found out:
Based on my findings, this portfolio would cost 1.80% each year of which 1% would go to compensate the advisor (the advisor would then have to split his take with the firm). So, based on a portfolio of $160,000 the annual expense would be around $2,880 ($160,000 × .018 = $2,880). Of that $2,880, the advisor would get $1,600. As the portfolio grows, the advisor’s take would grow. The more the investor makes, the more the advisor makes. I’m all for that. The only problem I have with this particular set-up is that the amount paid as a percentage NEVER decreases. Under most other assets-under-management programs, the fees are on a sliding scale and as the account value grows and crosses different thresholds, the fee percentage decreases. So although this broker’s take is $1,600 in the first year, if the account grew to $1,000,000, his take would be $10,000.
The one thing that stuck out to me when I looked at this portfolio was the number of funds. There’s 12 funds in this portfolio. Is that necessary? I have no idea. Sometimes I wonder if advisors recommend so many funds to make it look like they are doing some work. With so many funds one would think that this portfolio represented the entire market.
The entire market?
Here’s an idea: Why not just buy the entire market?
Just for kicks, I took this guy’s portfolio and put it in two mutual funds using the same allocation between domestic and international:
The fees for this portfolio are ONE-TENTH of the fees for the advisor portfolio! Granted, there’s not an advisor fee for this portfolio since Vanguard is a do-it-yourself type of firm. So this guy would have to decide if his advisor is worth $1,600 per year. Over this guy’s lifetime, the difference in fees between the Vanguard portfolio and the advisor portfolio is unbelievable. Take a look at the following graphic to see what I mean:
Assuming that both portfolios make the same 10% return before fees, the Vanguard portfolio would be worth nearly $1 million more than the advisor portfolio in 30 years. That’s a big difference!
This reader has to ask himself these million dollar questions:
1. Is my advisor worth $1 million over my lifetime?
2. What will I get for my million dollars?
3. Will I get what I pay for?