There are three types of fees paid by our clients for the investment management of their portfolios and financial planning. They are:

1. Expense ratios which are paid by the assets in that fund to the ETF or mutual fund company who manages the fund,
2. 0.4% to our firm for our basic services associated with investment management, and
3. 0.6% or less to our firm for our bonus or premium services associated with personal integrated comprehensive financial planning.

We are fee-only advisors, so the only compensation we receive is the 0.4% or 1% annual fee which is paid directly to us quarterly. We do not receive any commissions, kickbacks, or payments other than the client’s fee.

That being said, you can tell a lot from the expense ratio of an advisor’s preferred funds. Our list of preferred funds we call our Buy List.

Our Buy List is the list of funds we would purchase for clients who come to us all in cash. Our current Buy List is 46 low-cost index funds plus 26 individual stocks to represent Foreign Healthcare. Some of the funds on our Buy List are secondary funds which are used to help with tax-loss harvesting. Others are no transaction fee (NTF) mutual funds at Schwab to help us fully invest small quantities of cash. All together, our current Buy List funds represent 32 sectors across our six asset classes.

On July 30, 2022, I used Morningstar’s gross expense ratio data, the preferred funds of our Buy List (excluding the individual foreign healthcare stocks), and our current default sector allocations to calculate the following effective expense ratios.

This first table is our theoretical expense ratio. It is an illustration of a model portfolio of our Buy List.

Asset Class	Distinct Securities	Expense Ratio
Short Money	1	0.3500%
U.S. Bonds	4	0.0361%
Foreign Bonds	2	0.1155%
U.S. Stocks	7	0.1057%
Foreign Stocks	17	0.2904%
Resource Stocks	2	0.1200%
100% Appreciation	26	0.1861%
20% Stability / 80% Appreciation	32	0.1624%
40% Stability / 60% Appreciation	32	0.1388%
100% Stability	6	0.0679%

 

You can see from this table that our 100% Appreciation (all stock) model portfolio has an expected expense ratio of 0.1861%.

While many investment managers require their new clients to liquidate their existing holdings to cash, we integrate sentimental positions, those that are so highly appreciated it is not worth selling them, or suitable client-preferred strategies into our investment strategies. In this way, many clients experience a higher or lower expense ratio than those shown in the above table.

Using Morningstar’s gross expense ratio data and excluding holdings like cash, individual stocks, individual bonds, etc. which do not have a Morningstar expense ratio record, I calculated the following average expense ratios experienced by our clients as of July 30, 2022.

Asset Class	Distinct Securities	Expense Ratio
Short Money	7	0.4078%
U.S. Bonds	64	0.0484%
Foreign Bonds	13	0.1224%
U.S. Stocks	716	0.1070%
Foreign Stocks	377	0.2562%
Resource Stocks	107	0.1518%
Overall	1,284	0.1475%

 

This average expense ratio includes things like sentimental or highly appreciated positions which the client had before our management, managed employer plans where the fund selection is limited, and 529 plans where the fund selection is limited. We strive to liquidate holdings with the most egregious expense ratios.

This analysis would suggest that the expense ratio for our ideal investment strategy is approximately 0.186% (19 basis points) for a 100% stock portfolio. This expense ratio is paid directly from the assets in the funds to the fund companies.

With the addition of our basic services fee, which primarily pays for the investment management services, this brings the cost on the portfolio up to 0.586% (59 basis points).

We believe that this kind of honest conversation about compensation is part of the foundation of the trust we forge with our clients. We try to put everything face up on the table so our clients can have confidence in us. We start this process by openly and publicly publishing our strategies as articles on our website. We continue this in the client relationship by involving the client as deeply into the plan design process as they want to go. And yes, we include this honesty right down to how much we are compensated and how costly our investment recommendations are.

Photo by Dose Juice on Unsplash. The photo has been cropped and rotated. Expense ratio data gathered from Morningstar Advisor Workstation.