This article originally appeared on the Wall Street Journal by Neal Templin. Viewers will likely need a WSJ subscription to access the full article. A preview is excerpted below.
Knut’s commentary: Jack Bogle is smiling in a big way; the cost of indexing and ETFs, as Mr. Rudman discovered, is a good value. But an important issue in AUM fees is left unanswered. How much of the 1% fee is for asset management as opposed to financial planning? In the article, Mr Benningfield’s experience suggests a lot of financial planning is included. Financial planners should be concerned that these types of discussion undervalue what they do. Asset management fees and financial planning fees are not well differentiated in the article.
Keith Rudman used to pay hundreds of thousands of dollars annually to an adviser who charged him a fee on managed assets.
Four years ago, the 62-year-old North Carolina resident got rid of the money manager and moved his eight-figure taxable portfolio into passive investments. Mr. Rudman now uses a planning firm that charges by the hour for advice on everything from tax-loss harvesting of investments to estate planning.
“They’re providing a ton more services than my old financial advisers and they’re charging me between a 10th and a 20th as much,” he says.
Mr. Rudman is among investors who are seeking—and finding—alternatives to traditional financial advisers who charge a certain percentage of assets under management. Even as commissions on mutual funds and trading fees have dropped in recent years, the fees that registered investment advisers charge on portfolio balances have edged up. The average investor with $750,000 paid 1.04% of invested assets in fees in 2020, up from 1.02% in 2015, according to Cerulli Associates, a research and consulting firm. Meanwhile, an investor with $10 million paid 0.62%, up from 0.54%.
The growing alternatives come as many experts are predicting lower market returns after years of soaring stock and bond prices. Morningstar Investment Management forecasts that U.S. stocks will average just 1.3% annual returns over the next decade, while domestic bonds will return 1.8%. Other analysts are more optimistic, but hardly anyone sees markets doing as well as they have done in recent years. Stocks returned 14.7% annually and bonds 3.4% in the 10 years ended June 30.
When a portfolio is rising by double digits, a 1% fee might seem less significant, though it still takes a toll on portfolio growth. But in a lower-return environment, fees consume a bigger portion of gains.
Read the full article on the Wall Street Journal.
