Many of you are overpaying for your investment advice, sometimes because of poor results, sometimes because of grossly indecent fees, and sometimes because of an ugly mix of the two.
In a regulatory filing, Morgan Stanley neatly lays out what investors should pay fund managers across a host of different asset classes, ranging from 0.23% for municipal fixed income to 0.42% for small-cap equity. That’s fairly clean and easy to understand. But the same document also states that Morgan Stanley’s financial advisors can charge as much as 2.5% of assets annually to manage a client’s money, and that’s on top of the underlying fees of the investment products.
It’s tough to beat benchmarks when you start out nearly 3% in the hole. When pressed, Morgan Stanley Executive Director Christine Jockle merely repeated that the top fee was 2.5% for “all clients,” including those at the private bank, but “advisory fees can be discounted on total assets within the client household.” Not much transparency there. According to industry tracker PriceMetrix, 0.65% was the median fee paid to advisors by clients with $10 million in net worth. Not bad, but it also means half paid more than that; PriceMetrix says 13% of the decamillionaires surveyed paid 1% or more.
Doug Black of Aronson SpringReef, an advisory firm focused on wealthy clients, has some useful advice on that front. Black served as chief operating officer of UBS Private Wealth Management before starting his practice in 2010 to help rich folks evaluate financial advisors. He has, over the past 18 months, reviewed 31 client portfolios with serious performance issues; they were collectively sitting on $650 million in assets. He compared their portfolios over three years to benchmarks or low-cost exchange-traded funds, and found that between high fees and poor performance, they left $13 million a year on the table. “Their advisors weren’t nickel-and-diming them,” Black says, but they were often overcharging for poor performance. “Some of them were two to four percentage points below the benchmark.