If you’re retired or don’t make trades frequently, you might be paying too much money to your broker in investment fees.
Over the next two minutes, Steve McDonald explains why wrap-fee accounts aren’t as good of a deal as they once were.
It’s time to reevaluate the cost efficiency of wrap-fee accounts for retired persons. You know, the kind where you pay a flat percentage annually based on the value of your account and you trade as much as you want, but with no commissions per trade.
I was a huge fan of fee-based investing for two decades. In fact, it was such an improvement over the old commission system, I recommended it to just about everyone. But I’m not sure anymore if it is as good a deal as it once was.
When it cost a minimum of $100 per trade to buy and sell stocks – $250 to $300 wasn’t unusual either – wrap-fees seemed like the answer to a lot of brokers’ and clients’ prayers. It solved most of the problems that plagued both parties.
But, the cost to trade now is a fraction, a small fraction, of what it was even 15 years ago. Even the higher-cost online brokers are about one-tenth of what the old commission rates were. That’s why the cost benefit for wrap-fees just isn’t there anymore in all cases.
And, let’s face it, most of us, not all, but most just don’t trade as much now as we did before retirement. We buy a good company that pays a good dividend, a reliable one, and we keep it. The goal is to get a stable return, some income and some growth long term.
Or, we own a bond for the income and hold it for five or six years.
Fee-based trading has become so popular, it is rare to find an advisor who will manage an account on a commission basis. But the kind or amount of trading we do as retired people is not what made wrap-fee accounts the success they are.
If you don’t trade enough to cover the annual fee at today’s trading prices, not what it cost to trade in the ’90s, they aren’t any more cost-effective than when a single trade cost a minimum of $100.
Yes, an advisor should be paid a reasonable fee for his efforts and the time he spends managing your money. They do provide a service and they should be paid for it.
What is unreasonable is paying a fee that is based on more trading than you are doing now. And all fee-based accounts are based on a certain level of trading activity that very few retired people ever reach.
If you have a fee-based account and you fall into the type of low trading activity I described, give your advisor a call and ask what your options are and how your costs can be reduced to reflect how you invest now.
Your advisor may not be comfortable with your request and he probably isn’t going to lower his fee without some pushing.
Just ask him what level of trading activity is assumed in the annual fee you are paying. And don’t accept, “You are at the minimum now” as an answer.
If you don’t ask, you’ll never know. Make the call.