Turning $500k over to a planner

What financial planners do and where the costs are hidden.

By Walter Updegrave, Money Magazine senior editor

NEW YORK (Money) -- Question: What is a fair fee for a financial planner to charge to manage a portfolio worth about $500,000? - Joe, Southaven, Mississippi

Answer: Only you can decide whether you're satisfied with the the service and performance you receive from a planner. But I can tell you about the different types of portfolio management services you might want to consider - and give you an idea of how much they might cost.

And with this information in hand, you can evaluate a few alternatives and come to a more informed decision.

The arrangement most people in your situation end up going with is what's known as a "managed account." The planner or other adviser turns over your portfolio to an investment adviser - or a "money manager" - who selects stocks and bonds and other securities for your account.

The money manager typically specializes in a particular type of investing - growth stocks or value or international or various types of bonds. So to assure you have a diversified portfolio, your planner may recommend divvying up your money among a few different money managers.

The amount required for this type of account may be as low as $25,000 (or less in a few cases), although $100,000 is a more usual minimum, and these accounts can run well over $1 million.

This set-up doesn't necessarily give you direct access to big name money managers - for the most part, you can count on notices of the trades and quarterly performance reports.

As for a tailor-made portfolio, forget any notions of the money manager sitting in front of a computer screen, saying to himself, "Hmmm, I wonder if Joe of Southaven, Mississippi is more into oil drilling companies or refiners for his energy exposure?"

Fact is, money managers typically buy large blocks of the stocks they like and then allocate them to the various accounts they oversee. So over time, most of the accounts that a money manager runs will look pretty much the same.

That said, some managed account programs allow you to set filters so that you can exclude certain sectors of the market, such as technology, if you happen to work for a tech firm, or tobacco or weapons makers if you're opposed to such companies.

Some firms will also employ a "tax-efficient" approach - that is, try to minimize taking gains in stocks in years when you already have a sizeable tax bill or perhaps realizing gains if you have losses in other accounts.

So what does all this cost? Well, most of the time investors like yourself pay for this type of managed account through what's known as a "wrap fee" - that is, a single fee that pays the money manager, covers all the trades in the account and also compensates your planner, who should be monitoring the money manager's performance.

The size of the fee can vary depending on the program and, more importantly, the value of your account. Generally, though, fees start at roughly 2 percent to 2.5 percent for smaller accounts ($100,000 or less). By the time you get to accounts of $500,000 or so, you're probably talking around 1.5 percent.

Keep in mind that there is often room for negotiation on these rates. Basically, the amount going to the money manager and for trades is pretty much locked in, so what you're really negotiating is what sort of cut your planner is going to get. I can tell you, though, it's not uncommon for investors to save a quarter of a percentage point or a half a percentage point, possibly more, by shopping around and negotiating.

There's another version of managed accounts that invest in mutual funds or even ETFs (exchange traded funds). So instead of having a portfolio of individual stocks, you get a portfolio made up of various funds. The advantage is that you can get much broader diversification for an account of $500,000 or less than you can with individual stocks. The disadvantage is that you have virtually no control over what securities the fund manager chooses or what taxable gains he passes on.

If you go this route, you'll pay a fee for the planner to pick the mutual funds for you, plus you'll pay the underlying management fees of the funds. So when you talk to a planner about this option, make sure you're getting a cost quote that includes all the fees. You'll probably be looking at total annual fees of 1 percent to 2 percent, although that fee can be substantially lower if you use low-cost funds and index funds or ETFs in particular.

Aside from dealing with a planner for this type of account, several large mutual fund companies, including Fidelity and Vanguard, will put together and manage a portfolio of funds for you, assuming you meet their minimum account requirements ($50,000 and up at Fidelity, $500,000 or more at Vanguard).

There are other ways to go. If you invest in a target-retirement fund, for example, you get a fund that is in and of itself a diversified portfolio with a mix of stocks and bonds that is appropriate for someone your age. What's more, that mix gradually becomes more conservative as you age. (For more on how these funds work, click here.)

This choice may not have the cachet of being able to say you have a managed account. But in my opinion at least, it's a good option for many people and, if you choose the right fund company, it can also be a very cost-effective way of getting a diversified portfolio in one convenient package.

Indeed, the target funds we recommend in the Money 70, our elite list of recommended funds, charge well below 1 percent per year. Not bad for a managed portfolio of funds that automatically becomes less risky as you age.

So now you've got some options to consider. I'm sure that if you check out the various alternatives, consider their prices (after a bit of negotiation in the case of managed accounts) and then weigh the attention, service and performance you'll likely get vs. what you'll have to pay, you should be able to find a deal that seems fair to you.


ETFs for the long run

Pensions: Annuity or lump sum?

Moving taxed funds from an IRA to a Roth IRA

What to do with a $20,000 inheritance

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