NEW YORK (CNN/Money) -
A financial planner wants to manage the mutual funds in my IRA on a fee basis. What is the average fee charged for this service?
-- Roger Hallstein, Euless, Texas
As you might imagine, fees can vary pretty widely for this type of arrangement, depending on the adviser, what type of service is involved and the value of your fund portfolio. Generally, I'd say, though, that if you're talking about a fund portfolio worth $100,000 or so, you should expect to pay about 1.5 percent per year for an adviser who will help you build a portfolio of funds, monitor it for you and, if necessary, recommend replacing funds that aren't performing up to snuff. Of course, you might find some advisers willing to do it for 1 percent, while others might want 2 percent or even more.
If you're talking about a larger portfolio, you might get down closer to 1 percent or so, and if you're talking about a really large portfolio -- say, $1 million or more -- the fee would typically start to drop below 1 percent. On the other hand, if your portfolio is worth less than a hundred grand, you would likely end up paying something closer to the higher end of that 1.5 to 2 percent range, and perhaps something even more than 2 percent.
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From Money 101
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Some advisers have a minimum fee, say, $1,500 a year, to make it worth their while for small accounts. So if you apply that minimum to a portfolio of $50,000, you would be talking 3 percent per year, at least based on its initial size.
Keep in mind that these fees are almost always on top of the underlying fees charged by the mutual funds. Which means the total fee you're paying can really begin to add up. Let's say, for example, you find an adviser willing to handle your $100,000 portfolio of stock funds for 1.5 percent. If your stock funds also have annual expenses of 1.4 percent or so -- which is about the average for domestic stock funds, then effectively a total of 2.9 percent in expenses each year is being deducted from your fund portfolio's return before any of the gain filters down to you.
So if your portfolio earned 10 percent before expenses, your after-cost return would be more like 7.1 percent. Or, to put it in terms you might be more familiar with these days, if your portfolio lost 10 percent before expenses, then you would really be down 12.9 percent after deducting costs.
Is it worth it?
The real question, then, is whether the services the adviser is providing are worth the fees you're paying. Clearly, only you can decide that. Perhaps left to your own devices, you might never get around to building a diversified portfolio of funds. Maybe you would leave your money in a bank savings account. In such a case, the adviser's fee might be worth more than the annual fee because over the long run you were able to earn much more in funds than at the bank.
On the other hand, if you're reasonably familiar with the process of building a diversified portfolio of funds -- and you can get tips on that by going to our Asset Allocator -- then you have to ask yourself whether the adviser's advice is going to help you earn enough extra return to justify the fee.
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MORE ASK THE EXPERT
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One final note: trust is a major issue these days. So if you decide you do want to go with an adviser, be sure to check out several, compare their fees and check out their backgrounds. The place to start is by going to the Securities and Exchange Commission's site. And remember: "official" fees are usually subject to negotiation. So don't be afraid to ask for a discount. Hey, it can't hurt, and it might help.
Walter Updegrave is the author of Investing for the Financially Challenged and can be seen regularly Monday mornings at 8:40 am on CNNfn.
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