Tag Archives: fees


Fees Can Destroy Your Return

In an environment where a diversified portfolio is only expected to return on the order of 6% annually, any fees will have a significant impact on your outcome. In the same way that investing for the long-term takes advantage of the power of compounding, the regular or recurring fees you pay reduces the overall potential of your portfolio. To illustrate the point, here’s an example from the SEC on its own fee fact sheet: If you invested $10,000 in a fund that produced a 10% annual return before expenses and had annual operating expenses of 1.5%, then after 20 years you would have roughly $49,725. But if the fund had expenses of only 0.5%, then you would end up with […]

Indexing and the 2014 “Stock-Picker’s” Market

In January of this year it was widely believed 2014 would be a “stock-picker’s” market. While the S&P 500® index of large U.S. stocks produced an extremely generous return of more than 30% in 2013, an indexing strategy was deemed unlikely to be effective in 2014 — or so active managers argued in an attempt to justify their high fees. While several months remain we can still take a preliminary look at the results. The stock market was not quite as favorable this year as it was last year. The S&P 500 produced a rate of return of only  about 7% during the first six months of 2014. But did active managers finally demonstrate their superior skills? The answer is […]

Smart Beta

Fads and fashions have always been part of the financial markets. Around the turn of the century Internet-related stocks were regarded as reliable instruments for growing and preserving wealth. During the early 2000s, real estate was the instrument of choice for savvy investors. Today “Smart Beta” is the mantra of legions of securities salesmen who claim that broad-based low-cost index funds are sub-optimal and that better results can be obtained by biasing portfolios toward a number of characteristics that promise higher returns. There is no universally accepted definition of “Smart Beta.” What most people using the term have in mind is that it may be possible to gain excess (greater than market) returns using a variety of relatively passive investment […]

Why Whole Life Insurance Is A Bad Investment

When you have children, many people tell you it’s important to buy life insurance to protect your family. You’ll have two options: Term Life Insurance. Term life is a life insurance product that covers a limited term in return for a constant monthly premium over the covered term. For someone who is 30 years old, premiums can be less than $75 per month. Whole Life Insurance. Whole life is a hybrid investment and insurance product that covers you until death. For someone who is 30 years old,  the premiums can be less than $800 per month, and they don’t change over the life of the policy.[1] Whole life insurance is a more complicated product than term life insurance. Like universal life or […]

Five Ways ETFs Surpass Index Funds

We often get the question from clients: What is the difference between an index fund and an ETF? Even people who understand ETFs don’t understand the difference between these two kinds of investment products. We believe ETFs are index funds, evolved. To understand why ETFs represent such an advance over index funds, you have to look a little deeper than the most basic explanation of the difference between them. Financial advisors will tell you that an ETF is different from an index fund because it trades like a stock, throughout the day. Index funds, which are a kind of mutual fund, can only be purchased or sold at the end of the day after market close. Most ETFs, like most […]

The Case Against Maxing Out Your 401(k)

2012 IPOs: High Expectations, No Assurances

Most every personal finance blog I have ever read recommends maxing out your 401(k) contribution. They tell you to “just do it” – contribute as much as you can, as early as you can. I couldn’t disagree more. Forced savings I believe most bloggers (and many financial planners and low-quality investment advisors) recommend maximizing 401(k) contributions as a way to enforce a savings discipline. They believe that without automatic deductions, people won’t save at all. Our readership tends to be pretty disciplined and intelligent in their approach toward their finances, so I don’t think they need such a brute force recommendation. For our clients and readers, we emphasize transparency, rational decision-making and the use of mathematical tools. We recognize how […]

Why Your 401(k) Plan Sucks

A recent study found that the average fee on a 401(k) retirement plan was an appalling .93% of assets. The fees in the most expensive 10% of plans were even more shocking: 1.72% of assets.  That’s huge in an environment where most people hope to earn annual returns of 6% before fees. The average 401(k), meanwhile, offers 15-20 choices of funds, which have higher expense ratios than those you would find if you were buying through a brokerage for your IRA. A typical lineup: Many actively managed mutual funds, a handful of passively managed index funds, and very few ETFs. If you’re an educated investor, this sounds familiar. You always suspected you were paying a lot in fees, even though […]

Why Wealth Managers Have High Account Minimums

At a recent investing seminar at LinkedIn, a young engineer asked a question I’ve heard repeatedly over the past year: Why do Private Wealth Managers have such high account minimums? Financial advisors typically earn handsome livings, especially Private Wealth Managers who work for the big Wall Street firms. Those Private Wealth Managers can easily make $500,000. The top Private Wealth Managers make about $900,000, and that doesn’t include their recruiting bonuses, which often are in the millions. I don’t want to comment on whether this is justified. It’s just the market rate firms pay to attract people to the job, which in most cases means applying Modern Portfolio Theory to a client’s assets. If you assume an average Private Wealth […]

If ETF Fees Are Falling, Why Do Advisors Cost So Much?

In the last few weeks, there have been two new developments in the ETF price wars that are important to Wealthfront clients and investors in general – moves by Vanguard and BlackRock that will significantly lower ETF fees. At the same time, we’re starting to see the media raise the question that’s been on my mind lately: Why do traditional advisors charge so much when the underlying investment products (the ETFs) are getting cheaper and cheaper? Two weeks ago, Vanguard announced it will change the indexes it uses for 22 of its index funds and ETFs. For instance, it will now use FTSE for international indexes in place of its previous index provider, MSCI. Most people don’t realize the publishers […]

Do You Need A Private Banker?

A private banker is someone who focuses on the needs of wealthier-than-average clients. Sometimes, he or she works for a private bank within a large institution, like J.P. Morgan Private Banking; other times, his or her institution is a private bank, like U.S. Trust. Private banks used to exclusively serve people with millions of dollars in assets, but in recent years they’ve been broadening their services to appeal to people with somewhat less. After your company has an IPO or is acquired, you might get a knock on the door from a private banker. In this recent Quora post, Wealthfront CEO Andy Rachleff listed the pros and cons of using a private banker. Among the pros: A private banker might […]