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Are You Spending Too Much for Investment Management?

Many people believe they must spend a lot of money to receive quality investment management services. That may have been true once, but it isn’t true any longer. Professional investment management services have become a commodity, resulting in a drastic reduction in costs. And the availability of index funds and exchange-traded funds has also had a significant impact on prices.

The annual expense ratios for mutual funds and variable annuity accounts shouldn’t exceed the amounts found in the following table. If your money is invested in index funds or exchange-traded funds, pay attention to the Passive column, and if you’re invested with a private money manager or in an actively managed mutual fund, then you need to look at the Active column.

Annual Expense Ratios
Passive Active
0.20% for a Standard and stock funds 1.00% for mid- to large-cap domestic Poor’s 500 Index fund
0.40% for small- or mid-cap stock funds 1.20% for large-cap foreign index or exchange-traded funds
0.60% for small- or mid-cap foreign stock funds or emerging-markets funds 1.50% for small- to mid-cap foreign stock index or exchange-traded funds
0.20% for domestic-bond funds 0.70% for domestic bond funds and exchange-traded funds
0.60% for foreign bond index 1.00% for foreign bond funds and exchange-traded funds

Private money managers, wealth managers, financial advisors, and so on hired to manage your mutual fund or exchange-traded fund portfolio on an ongoing basis often charge 0.20% to 1.00% on top of what the mutual funds and exchange-traded funds charge. So, total management expenses could range from 0.40% to 2.60% depending on the manager and the investments chosen. The high end is over six times the expense of the low-cost alternative. Try to stay at the low to middle end of this expense range. Keep in mind that your overall portfolio allocation is the deciding factor in your total cost.

Also, money managers hired to manage a portfolio of individual stocks on a long-term, buy-and-hold basis should charge no more than 1.00% per year. And money managers in charge of fixed-income portfolios should charge no more than about 0.60% per year. If you’re paying more than that, you should try negotiating with your current advisor and, if that fails, shop around for a new advisor!

On top of the fees discussed here, there are still sales commissions and surrender penalties on thousands of funds, so watch out for total costs, too.

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