Management fees

[DTS]

I just received a call from a client who asked me a question about management fees for her portfolio. I told her what little I know about this, but that I would contact a couple of "friends" who could tell me. So "friends", here are the details of what she told me:

Balanced portfolio with no options, value about $650,000.
Management fees in excess of $10,000 (approx. 1.65%)

Does this seem excessive to you?

Thank you,
Dennis

[Brian EA]

Let us say that you bought a Mutual Fund for $10000 and at the end of the first year the value increases to $12000. The $2000 increase is net of management fees. In terms of %age. the increase is 20% net. Let us sayThe gross increase is 21.65% . 1.65% goes to the fund manager for managing the funds and other misc expenses.
If he buys A shares there is an upfront charge. B shares do not have an upfront charge ; however they have other charges such as 12b charges where the client over time pays a lot. Of course after 7 years B shares are converted to A shares .Before that the broker makes a killing. Most of them do not ask you what type of shares you are interested in, They automatically get you the B shares
So tell your friend that management fees are not deductible. They are deducted before their gain is added to their basis.

[veritas]

Sounds like a wrap fee to me. The fee will be charged annually based on the asset value. It would be seperate fee paid to the advisor. It would be a deuctible expense. More and more advisors are going to the type of fee based compensation. There would be no load fees front or back with this type of arrangement.

Whether it is excessive or not would be a question for your client. The advisor should be providing service to the client for the fees.

[oceanlovin'ea]

Same situation

I too have a client, an elderly lady, with a large portfolio. Her 1099 from Merrill Lynch list personal investment advisor fee of over $9800. Her Schedule D had 190 transactions on it. Her broker has pages of calls. He must spend his days playing with her money.

The first year I did her return I showed it to her and told her about all the calls on her account. I told her that it makes her tax prep fee higher and probably his fee higher too. And really at her age, she didn't need the income or the loss in her account. She told him to stop doing it, but he didn't. The next year I mentioned to her that he was still doing it. She said I told him to stop. But I'm not getting any more involved in it. I have given her the information and that is all I can do.

But I deduct the advisor fee on her schedule A every year. If she has to pay him that much money, she should get some benefit from it.

Linda F

[Matt Sova]

Broker Fees

If a broker is using a management fee, say 1% or 1.65%, then that is the amount they are paid out of the account. Usually there are no commissions to the brokers regardless of the number of trades in the account. You can request a copy of the brokers ADV (I think that is what its called) and see what it says about how they are compensated.

Now the 1.65%, do I think that is excessive? Depends on where you live. I know a couple fee based brokers near me that would charge between .75% and 1% for that size of an account.

[DTS]

To All

Thank you for all your input. I left a message for the client to call, but she has not called back, yet. I will tell her what all your thoughts are and let her go from there.

I appreciate your help. Thanks, again.

Dennis

PS I just this minute rec'd an email with a list of charges that appear to be charges the broker charged per account. Not for sure until I verify this with her, but this could be the ADV you were talking about Matt???

[Matt Sova]

No

The ADV is a form that they have to have available to anyone who requests it stipulating how they will be compensated. Actually it is Form ADV Part II (Disclosure Statement).

[John of PA]

Management Fees are deductible

Management Fees, or any type of investments fees are decuctible as a Misc Sch A itemized deduction, subject to 2% floor. (except buy/sell commissions) .The way I see it, broker fees or manangement fees paid are immaterial. The bottom line is how the portfolio did, return wise, net of fees. I have found my broker and his staff work very hard for me, return calls, and I have consistenly outperfomred the S&P for several years. All with simple long-term investing. So "you get what you pay for". Of course if the portfolio is performing poorly, the manager should be replaced.

[DTS]

Yes

John,

I totally agree with you. I have not had a chance to look at the bottomline of these accounts. She has asked me to go over them with her and give her some ideas, if this is the case.

It's staggering to me how clients will just sit by and let their investments dwindle down to nothing before they decide to do something more productive. Many times they don't even look at the monthly statement to see how they are performing!

Dennis

[taxguy]

I have a current case where for the last three years the client has lost between 5000.00 and 10000.00 dollars each year. On top of that the client has paid between 13000.00 and 15000.00 each year for management of their account. I pose the question what is this broker exactly managing?

On top of my tax duties I am also a licensed financial planner so I can see both sides of the coin here. However Unfortunately clients with lots of money are usually the one that bad brokers take adavantage of the most

[John of PA]

Responsibility

I believe these people are really just avoiding responsibility by not opening their monthly statements. Then if things go wrong, they can say " I didn't know, I didn't realize". But you and I know that hey really did not want to know and therefore be reposnsible. Well back to the taxes.