Friday Reading: Advisor Fees

By Harry Sit

The Impact of Investment Costs on Safe Withdrawal Rates by Michael Kitces at Nerd’s Eye View

Michael Kitces says a 1% advisor fee doesn’t really reduce the safe withdrawal rate by 1%. It only reduces it by 0.4%, because withdrawals go up with inflation and the fees go down as assets are drawn down.

Note the emphasis is on the *safe* withdrawal rate. If assets don’t deplete, fees don’t necessarily go down. Read on.

*****

Retirement Income and the Tyranny of Compounding Fees by Wade Pfau

This article by Wade Pfau shows the effect of 1% advisor fees cumulatively. My eyeballing table 2 says a 1% fee cuts the total stash by about 1/3, sometimes to 1/2 or more. Learning about investing has a huge payoff.

It’s OK to use a financial advisor and most people probably should use one. Just don’t settle for 1%.

*****

Picking Bonds Based on Performance and Yield by Mike Piper at Oblivious Investor

When I was at the public library last weekend browsing section 332, a woman was scanning the shelf in the same area. I thought I know the subject well so I asked her what kind of books she was looking for.

"Bonds." she said.

Hmm, bonds, it’s definitely a change in investor’s mindset. You’d think people won’t be so interested in bonds when yields are so low. But you know what excites people? How about 10-year average return of 9% per year? Yeah, a time machine would be great!

I have bonds. I wrote a small book about a special type of bonds. Still, I think the best days for bonds are behind us. Not that they will bomb, but 9% a year just isn’t going to happen.

I suggested to her Smart and Simple Financial Strategies for Busy People by Jane Byant Quinn. Not exactly what she was looking for but I hope she will find it helpful.

*****

Pensions: When a Bird in the Bush Can Be Worth More than a Bird-in-Hand by Scott Burns

The lump sum payout value of a pension is discounted at a higher interest rate than the current prevailing rate. Take the monthly payout. Very interesting statement in the question:

"With the exception two fee-based advisors everyone says take the lump sum."

I wonder why.

*****

How A Good Financial Advisor Is Like An Auto Mechanic by Larry Ludwig at Investor Junkie

Except most financial advisors don’t like doing one-off’s as auto mechanics do. How many people will sign up if auto mechanics offer annual maintenance contracts? Only if it’s "free" (bundled into the price of the car).

*****

I Just Gave Up $4000 Per Month to Keep My Freedom of Speech by Mr. Money Mustache

An inside look of blog economics. Would I give up $4,000 a month for using some words? Probably not.

2.2% Rewards Card $444 Bonus

Earn 2.2% toward travel on all purchases with Barclaycard Arrival World MasterCard. No caps and no foreign transaction fees. 40,000 bonus points if you make $1,000 or more in purchases in the first 90 days. $89 annual fee waived in the first year (40,000 bonus miles pay for 5 more years after that). Learn More

Software picked, likely related posts:

Posted on June 22, 2012 under News. Keywords: , , , .

Leave a comment

Comments

2 Comments on Friday Reading: Advisor Fees

  1. Investor Junkie on June 22, 2012
     

    Hi TFB,

    Thanks for the mention! At least with auto mechanics you usually only contact them when something is broken. I guess the same could apply to your personal finances though.

    You can buy extended warranties for old cars, which are effectively annual contracts for a mechanic.

  2. KD on June 22, 2012
     

    While the tyranny of compounding fees is real, the article simplifies the non-linear issue into a linear one. While fees are a controllable aspect in investing, their effect on returns is not linear on a specific fund. Some funds do much worse, some do great despite the hefty fee. When you don’t know the future outcome, it is best to go with a low cost option when choosing index funds. For actively managed funds, there are benchmarking issues and as such don’t lend themselves to an apple-to-apples comparison. Buying them is an act of faith in my opinion.

    It would have been better if he had used a real mutual fund, preferably actively managed one with hefty fee vs an low-cost index fund to document the tyranny.

    For example, I have an actively managed intermediate bond fund in my 401k that I invest in with a 0.76% ER, after a so-called “discount” in fees. This seems ridiculous when compared to a similar Vanguard fund. But the fund follows the Barclay’s US aggregate bond benchmark to the T and has a lower risk profile for its portfolio.

    I am not contradicting what Wade is saying. Just that real life is not as simple and the decision making is never that easy – especially if your primary vehicle of retirement investment is your 401k plan where you have no say in the fund line up and have limited space in an IRA.

Tell me what you're thinking, but please don't spam. See comments moderation policy.