Publication: Investor's Notebook
A 1 PERCENT WRAP FEE IS NOT OK | |
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Investor's Insight - December 1, 2006
"A Digest of Investment Opinion From the
World's Leading Financial Advisers"
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A 1 PERCENT 'WRAP FEE' IS NOT OK
by Scott Burns
Q: Our financial adviser, with First Command financial
planning, is suggesting we move all of our current in-
vestments to its version of the wrap account, Select
Investor Profile.
We are investing $500 a month in Pioneer Midcap Value
Fund A (value: $275,850), $400 a month in Pioneer Value
Fund A (value: $327,800), and $700 a month in Templeton
Growth Fund Class A (value: $321,500). We also have
regular and Roth IRAs with Pioneer Growth Fund A valued
at $187,885.
We are retired with pensions totaling about $60,000 per
year. Our capital gains last year were about $60,000,
and interest income was around $20,000. My concern is
the management fees of 1 percent on its Select Investor
accounts. Does this make sense? -- N.S., San Antonio
A: Your adviser will be increasing his income nicely.
So if your primary concern is your adviser's welfare,
this is a really good idea.
But if your concern is your investments and your retire-
ment, then you should consider alternatives. With $1.1
million in financial assets, you have lots of choices.
Let me explain.
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Unless there is a major change in the quality of advice,
what you are being offered is an opportunity to pay more
money for a poorly constructed portfolio in which three
out of four fund choices are bottom 50 percent perform-
ers. Your adviser, on the other hand, will be increasing
his income from the 0.25 percent 12b(1) marketing and
distribution fee on each of your current funds to his 1
percent wrap fee, an increase of 400 percent.
What your adviser provided in the past was an opportunity
to pay commissions. There is no sin in this. Financial
sales people should be compensated for their effort.
The difference between a person who merely sells and a
real financial adviser, however, is that a financial
adviser actually helps you do two things.
First, make good investments.
Second, build an appropriately diversified portfolio
with those investments.
Others may differ, but I would give your adviser an F
on the first count and a C-minus on the second.
Let me tell you why.
The three Pioneer funds have consistently ranked in the
bottom 50 percent of their peer groups for performance.
Morningstar gives them a rank of two stars (below average).
About 71 percent of your money is committed to these sub-
par funds.
Only the Templeton Growth fund has provided performance
in the top 50 percent of its peers. It has a Morningstar
rating of four stars (above average).
Here are the facts on appropriate diversification: The
good news is that you have equity diversification --
domestic large-cap growth, large-cap value and small-cap
value plus international equity.
The bad news is that you are 100 percent invested in
equities. There is no allocation to cash, fixed-income
or REITs. Not a dime. Greater diversification would re-
duce risk of loss. It could also produce the same, or
better, return with less risk.
I am not just shooting from the hip here.
The annualized 10-year return on your portfolio is about
8 percent, and the funds have 10-year standard deviations
(according to Morningstar) ranging from 14.9 percent to
17.57 percent. Standard deviation is a statistical meas-
ure of the volatility of returns. In this case, your
portfolio earns about 8 percent plus or minus about 16
percent, most of the time.
Vanguard Star fund, a low-cost asset-allocation fund,
earned 9.3 percent annually over the same time period.
It did this with a standard deviation of 9.4 percent.
It got a better return with nearly half the risk.
According to its Web site, First Command uses funds
from AIM, Allianz, Fidelity, Franklin Templeton, Pioneer
and Western Reserve Life. If the current funds are wrapp-
ed, your total expenses will exceed 2 percent a year.
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That's never a good sign.
If the current funds are replaced with new funds, your
expenses will still likely exceed 2 percent a year.
With some luck (or a new adviser), you might get better
funds than you now have. But I wouldn't count on it.
What are your alternatives?
You have many. Here are a few:
Visit USAA. Like First Command, it has a long history
of service to the military, but at relatively low cost.
Many asset management firms will manage a $1 million
account for a total expense of 1 percent or less. You
could also invest your money in a low-cost asset-
allocation fund such as Vanguard Star or Fidelity Four
in One Index.
You can discuss this issue or any other topic in the new
Investor's Insight forum. Check it out here...
Investor's Insight Forum
(Investor's Insight reflects the opinions of experts. It does
not recommend any specific investments, and no endorsement is
implied or should be inferred. For more information, contact
the individual firms cited).
COPYRIGHT 2006 UNIVERSAL PRESS SYNDICATE
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