Low Fund Costs + Low Advisor Fees + Tax Efficiency = Greater Wealth
Mutual Fund Costs
Costs – not 5-star ratings, or historical performance, or a particular manager’s pedigree – are the only reliable indicator of a mutual fund’s relative future performance.
The data is perfectly clear: Active mutual fund investors, on average, underperform their benchmark indexes by the amount of costs they incur. And those costs are everywhere.
Consider just the costs of simply buying, selling and holding the typical actively-managed mutual fund: There are sales charges, purchase fees, exchange fees, redemption fees, management fees, 12(b)-1 fees, operating expenses, commissions, soft-dollar arrangements, spread costs, and the costs of turnover.
Many have estimated these costs can exceed 3% per year!
At Chesme, we only use low-cost passively-managed funds. On average, our passive portfolios cost less than 30 basis points (that’s 3/10 of 1%). There are no commissions or soft-dollar arrangements or 12(b)-1 fees or redemption fees, and turnover is kept to a minimum. All of which means that you keep more of your hard-earned money for yourself, and your investments are likely to grow faster over time.
Many fiduciary advisors have appropriately recognized the importance of using low-cost, passively managed mutual funds for their clients’ portfolios. Unfortunately, many of these same advisors have failed to look in the mirror and ask themselves if their pricing structure is fair and reasonable. Many advisors charge 1% per year or more on a million dollar portfolio – that’s an outrageous sum of money for any portfolio, but it’s especially egregious for passively-managed portfolios.
At Chesme, we have looked in the mirror and we’ve priced our discretionary program accordingly. We charge a flat fee based on the level of service required. On average, our fee ranges from $500 per quarter to $1,000 per quarter, regardless of portfolio size. That’s not only a fair price but it’s also among the lowest in the nation (and, perhaps, the lowest given our rigorous investment planning process and our ability to offer customized solutions).
Many advisors also ignore the impact that portfolio structure can have on your tax bill. Yet being tax smart about the “asset location” decision can save you substantial sums of money over time.
For example, under current tax law, it usually makes sense to place appreciating assets (such as stock funds) in taxable accounts, and to place income-oriented assets (such as bond funds) in tax-deferred accounts. Why? Because interest income is often taxed at a higher rate than capital gains and it makes sense to defer that tax for as long as possible.
In addition, many advisors will require that you use their model portfolios, even if repositioning your portfolio to their model would cause you to pay substantial capital gains taxes. At Chesme, we’ll make sure that our recommendations are as tax efficient as possible and we’ll customize them to meet your needs.