Wall Street Journal recently published, in their WSJ.Money magazine, an article titled “The Seven-Figure Portfolio Fee”.  Here’s a link to it:  <http://online.wsj.com/news/articles/SB10001424052702304250204579433392421114838>

The subtitle is “The cost of managing finances is coming down for many investors. But, for the wealthy, it’s a different story.

They proceed to discuss just how much assets-under-management fees add up to for very and extremely wealthy clients, starting with a $5million portfolio (managed at 1% of assets), a $10million portfolio (at 0.50% of assets), a $50million portfolio (at 0.25% of assets), and a $100million portfolio (also at 0.25% of assets — 0.25% seems to be the lowest tier to which most AUM-based advisors fees may reach, though when a client has that kind of money involved, of course, fees are certainly subject to negotiation!)

Anyway, the numbers are shocking (to anyone who hasn’t done the math already).  Over the course of 25 years, the $5million client will have paid $1,643,300 in fees (clearly they are including some kind of portfolio growth, since 25x$50,000 = $1.25million).  Now, of course, that doesn’t say anything about what that client got for all that money.  At 1% of assets, the client was paying $50,000 each year — again, that *is* a lot of money.

And it gets even worse — per the article, “the typical American household is being charged 1 to 2 percent of its portfolio”.  2%!

And if that paid for nothing but portfolio management, it’s an astoundingly high amount of money.  If all that client needed was someone to manage, say, a 60% stock, 40% bond portfolio in a cost effective and efficient manner, such a portfolio could be built out of index funds for about one tenth of that fee, and a portfolio manager putting together such an index-fund based portfolio should probably not charge more than 25-50 basis for it — meaning that if it’s just portfolio management and nothing else, that $5million client is probably paying somewhere between two and three times as much as he could be.

But if that client got the “whole package” – regular meetings to review the portfolio, the asset allocation, cash-flow projections, tax management and estate management issues, insurance reviews, advice about charitable giving, etc. – all that other stuff – the stuff where the experienced professional planner adds an enormous amount of value – if the client got all that, the $50,000 doesn’t sound like nearly as much as it did before.  Figure about $25,000 of that went to the portfolio management (say, 0.3 to 0.4% to the portfolio manager, plus the 0.1-0.2% fees on funds used to build the portfolio), then the client is really paying about $25,000 for the actual comprehensive financial planning.  That’s not cheap – not by any stretch – but when  client has assets of $5million, just a few smart planning moves could easily save that client $25,000 per year.

The larger portfolios make even more compelling stories, since, as noted immediately above, if 0.1-0.2% is going to ETF fees, the portfolio manager is probably not taking more than 0.1% on top of that — and finding a way to pay for the planning costs as well.  Now, of course, a $100million portfolio at 0.1% is still paying a manager $100,000 and if we’re talking about a portfolio built out of index funds, ETFs, etc, it’s not all that much more work managing that $100million portfolio than it is managing a portfolio half the size.  But that same $100million client is going to almost certainly require a lot more planning work, which more than makes up for it.  There are huge issues regarding deferring/realizing capital gains, taxes of all sorts (estate, federal, the new ObamaCare Medicare taxes), likely there is also involvement in setting up and managing trusts and distributions to beneficiaries, dealing with the attorneys and accountants (who, also, need to be paid – and probably in addition to all the fees noted above).

Anyway, it’s an interesting article, and it really makes one think about how much folks pay for their financial services.  What it really needs to do, however, is clarify for us just what, exactly, those fees really are for.

Calling them a “portfolio fee” is potentially misleading, and unfortunately, the industry-standard billing practice of financial planners – the “assets under management” fee looks very much like that.  Charging financial planning fees as a percentage of assets under management, because it’s tied to the portfolio and portfolio’s size, in particular, looks awfully like it’s just a portfolio management fee.  And if that’s all that it is, it’s outrageously high.  But if it’s what it should be – so much more than just a portfolio management fee – that is, if it’s a fee for portfolio management and comprehensive financial planning – well, it’d be nice if the industry could come up with a better way of communicating that.

Because if it doesn’t, folks are going to all move their money into a target date index fund and/or a “robo-advisor”.

Financial planning is a lot more than portfolio management.  Having a fee structure look like a portfolio management fee doesn’t do much to communicate this.  And if all you’re getting is portfolio management, it may be time to re-evaluate your situation.