401ks,  Adams Financial Concepts,  Return on Investment


Do you know what your broker is charging you? The North American Securities Association recently published a survey of 34 big and regional brokerage firms and found their fee disclosures were complicated and ranged from 1 to 45 pages. While the disclosures met the technical requirements of disclosure, they were anything but straight forward. The disclosures were often in documents some people put at the side of their bed to read when they needed something to bore themselves to sleep.

Fees are important because they can reduce performance. A 1% increase in fees will reduce a portfolio’s value by 17% over 20 years. A portfolio of $100,000 that grows an average of 10% a year will grow to $611,591. That same $100,000 with an additional 1% in fees charged will grow to just $514,166. That is a significant difference over most investor’s time frame.

I believe that many of the fees that clients actually hear about from their financial advisors are only a portion of the actual fees. For example, I often read about mutual funds with expense ratios of 0.90%. Actual fees paid by the client are closer to 4% to 5%! Undisclosed to clients (and financial advisors) are the fees/costs of transactions, cash drag, and taxes. The expense ratio excludes those costs.

Every time a trade is made in a mutual fund there is a transaction fee paid to the broker who executes that trade. It is far from free. Excluding the cost now associated with dark pools and flash trading, the average transaction charges add another 1.44% to the fee-cost of mutual funds. Mutual funds usually carry higher quantities of cash for buying opportunities, but even more importantly for redemption needs as clients move out of the fund. That is the “cash drag”. Whereas I try to keep my clients fully invested almost all the time, mutual funds will carry that extra cash. That will add 0.83% to the fee-cost of the fund. Additionally, there are the tax costs. I do what I can to reduce taxes. An example of something I do to reduce taxes is to sell (or double and sell) stocks held for a short term loss, and sell out gains long term if possible. This is a tax advantage. The average mutual fund adds 1.00% in fee-cost in taxable accounts. Add those fee-costs together and the actual fees run for just the mutual fund without the financial advisor’s part, 3.17% for tax deferred accounts and 4.17% in taxable accounts.1

When a financial advisor adds his 1% (the average fee advertised by many financial advisors), the actual fee-cost for a wrap account with mutual funds:

Taxable: 5.17%

Non-taxable: 4.17%

Eugene Fama of the University of Chicago shared the Noble Prize in economics this past year. One of his studies shows that fewer than 7% of all professional money managers do as well as or better than the market. When you look at the fee-costs it becomes pretty clear why that is. To do as well as the market the mutual fund manager would have to have gross returns before fees of 4.17% better than the market. This is not easily done.

I often say my fees are some of the highest in the industry. However, when all fees and costs are considered and compared the fees at Adams Financial Concepts LLC are in line or a little below the average. For equity (stock) and balanced (stock and bond) account the fees are as follows:

Size of Account Fee

$ 100,000 to $500,000 3.00% annually, and for the next

$ 500,001 to $1,000,000 2.25% annually, and for the next

$1,000,001 to $2,000,000 2.00% annually, and then

$2,000,001 and more 1.75%

In addition Fidelity charges an average transaction cost of 0.62%.

Since every portfolio for the Custom Portfolio Wealth Management (CPWM) is either invested in stocks or bonds, there are no other expenses or fees except a small transaction fee charged by the custodian.

For those fees clients receive the follow:

A customized portfolio specifically designed for the client’s risk and objectives

Management of buy and sell decisions

Research by Mike Adams on positions held in the account

Custody at a third party (usually Fidelity Investments)

Compliance review by a third party (Core Compliance of San Diego)

Quarterly reports comparing the account performance to benchmarks

Quarterly reports prepared by Morningstar taking data directly from the custodian

A quarterly letter with comments about performance and brief outlook for the future

All administration of the account

Tax advantage selling and buying that can add to clients’ return but does not show on reports

Minimal cash drag. Cash can be held in anticipation for purchasing securities at lower prices.

Regardless of the fees and costs, the most important thing is performance. There are few financial advisors who will publish their performance numbers. Either their firms do not allow it, or they choose not to show the actual results. Either way it seems like clients should be asking the question why performance is not shown. At Adams Financial Concepts we are proud of our track record. We do not beat the market (net of fees) every month, every quarter, or even every year. However, over the longer term we feel we strive to do so and have in the past been successful in doing so. While past performance does not guarantee future performance the track record is published for all to see.

For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more!

I want to hear your opinions; please leave a comment below and let me know your thoughts.


Mike Adams

Footnote 1: “Scale Effects in Mutual Fund Performance: The role of Trading Costs” Edelen, Evans and Kadlec, March 17, 2007


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