I’ve got mostof my retirement savingsin a managed account run by an investment firm foranoverall cost of just under1%of assets a year. Is there a way I can pay less?
—Paul H., Houston, Texas
Sure, there are severalwaysyoushould be able to cut yourinvestment expenses by a half a percentage point a year or so, if not more.
That may not sound like much, but lowering annual fees by half a percentage point over the course of acareer and a long retirement can boost the size of your nest egg by 25% and increase the sustainable income it generates by upwards of 40%.
So, how can you reap thesesavings while still maintaining a portfolio that jibes withyour risk tolerance and goals?
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One way is to open an account withone of the new breed of online investment firms knownas “Robo-Advisors.” These web-based advisers, including firms such as Wealthfront, Betterment and FutureAdvisor, rely on software programs or algorithms to generatediversified portfolios oflow-cost index funds or ETFs for a range ofrisk appetitesand financial goals. The fees vary from firm to firm, but expenses fora $50,000 accountmight average, say, 0.20% to 0.50% a year, plus the underlying annual expenses for the ETFs or index funds, perhaps another 0.15% or so.(At FutureAdvisor you may also incur some trading fees.)
In addition to creating your portfolio, suchfirms canautomatically rebalance your holdingsand, in the case of taxable accounts, do“tax loss harvesting,”a technique that, theoreticallyat least, may be able toboost your after-tax return.
If you go with one of these online firms, however, you would have to feelcomfortable dealing with a relatively new company (most online advisors have started up in the last five years or so) that you interactwith, if not exclusively, then mostly over the internet.The Paladin Registry, a service that provides advice on how to select advisers, recently rated 21 online investment advisers on the accuracy and thoroughness of the information they provide on their websites.
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There are other options, however, that combine the efficiency and low costs of technology with a human touch. For example, Vanguard is currently rolling out Personal Advisor Services, a program that uses financial informationand answers to risk tolerance questions that yousubmitonline to create portfolios of Vanguard index funds. What differentiates this service from the robo-advisers is that it also includes access to a Vanguard certified financial planner, who may be able to suggest refinements to the recommended portfolio based on an investor’s particular circ*mstances. The cost: 0.30% of assets a year, plus another .15% to 0.20% annually for the funds. The program requires a minimum investment of $100,000, although that mightdrop to $50,000 later on.
Soon youmay have an even lower-cost option.Charles Schwab recently announced thatinthe first quarter of next year its Schwab Intelligent Portfolios service will begin delivering algorithm-generated portfolios of ETFs to investors with as little as $5,000 to invest. Schwab says it won’t be charging aninvestment advisory fee or, for that matter, any other account fees. Investors will pay only the annual expenses of the ETFs. (Schwab declined to provide a list of the ETFs the program will use, but Schwab’s site currently lists several dozen ETFs with expense ratios of 0.20% or less.) Although theprogram is designed for investors to enter information about their goals and risk preferences online, theywill be ableto getassistance by contacting a Schwab reponline, by phone or at aSchwab branch office.
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Of course,you can also get a ready-made diversified portfolioby simply investing in a target-date retirement fund. Just pick a target fund with a date that roughly corresponds with the year you expect to retire, and you’ll geta target-fund that consistsof a blend of stock and bond funds designed for someone yourage. What’s more, that mix will gradually tilt more toward bonds as youage.If you stick to a target-fund that uses index funds to create its portfolio mix, you can keep annual fees below 0.20% a year.
And there’s always theoption of puttingtogether an ETF portfolio on your own. You’ll have to decidehow muchof your holdings to devoteto stocks and how much to bonds, and you’ll then haveto choose the specific ETFs to reflect that mix. But that’s certainly doable. (Indeed, if you wanted to game the system, you could simply put a portion of your assets into one of the programs mentioned above, and then create a similarportfolio with ETFs you pickon your own.)Your costs will depend on the specific ETFs you choose. But you should easily be able to create a portfolio with annual expenses well below 0.20%.
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One final note: If you check out robo-advisors’ sites, you’re likely to find a lot of information suggestingthat the combination ofdigital technology and modern portfolio theory allows these advisers to create highly efficient portfolios that deliversuperior results. Well, maybe, maybe not. In the 30 years I’ve been writing about investing, I’ve learned to take grandiose claimswith a good-sized shaker of salt.
So as you consider the options I’ve outlined above, don’t betooswayed by talk offancy-schmancy algorithms and such. Instead, focus onmaking sure you endup with a diversified portfolio that has low overall costs, and that you’ll be comfortable sticking with in good markets and bad. (11/4/14)
Walter Updegrave is the editor ofRealDealRetirement.com.If you have a question on retirement or investing that you would like Walter to answer online, send it to him atwalter@realdealretirement.com.
