Management Fees vs Transaction Fees
A
recent trend in mutual fund fees has major financial firms, advisors and
financial planners offering their services to individuals with no sales
commissions and, in some instances, with no annual 12b-1 fees. Instead these
firms impose an annual asset-based fee, which range from 0.5-2.0% of assets,
depending upon the size of the portfolio. These fees are known as asset-based
fees, portfolio management fees, etc. Regardless of the name these fees go by,
investors should realize that this type of fee is a separate fee for managing
one's portfolio; they are in addition
to the normal operating expenses of the mutual funds within the portfolio.
Many investors often mistakenly enter into an asset-based fee arrangement under the guise of no loads and no 12b-1 fees. In the majority of advertisements, the mention of no loads and no 12b-1 fees is prominently featured while the asset-based fee disclosure is buried in tiny footnotes. However, even in the disclosure, only the annual fee percentage is stated -- no hypothetical cost examples are given to illustrate how these annual management fees would affect portfolio performance.
There
can be situations where asset-managed fees are preferred; for example with
individual stock portfolios that trade frequently; a timing system; sizable
portfolios (over one million) where at least 33% of the holdings are individual
stocks. Before entering into any asset-based fee arrangement, calculate the
cost and determine if that cost justifies the management that one would
receive.
The key question for investors is whether portfolio management is actually required, which is generally determined by the size and complexity of the portfolio. If a buy and hold investor has the majority of assets in mutual funds, then there is little reason to pay the extra asset-based fees for individual portfolio management.
The majority of buy and hold investors just need a "game plan" -- an asset allocation strategy that reflects their investment objectives along with specific fund recommendations to fit that strategy. However, one does not need expensive asset-based fees to accomplish this; a flat fee or hourly rate with no other applicable fees is the most cost-effective way method.