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June 19, 2006
Ditch your money manager
Everybody focuses so much time and attention on minimizing taxes. But guess what? Taxes aren't the biggest drain on your returns. It's the fees and commissions being collected by those same advisors who are talking about all those nasty taxes. The fact is you'll pay four times more to your fund manager than you will to Uncle Sam in taxes. How, you might ask?
This is how: suppose you and your wife don't have any dependents when you reach retirement and you're at that 1 million mark and you decide you can live off $40,000 a year. And suppose the $40,000 is ordinary income so you'll have to take the standard deduction. The government gets around $4000 but your money manager will get four times that amount.
You see the fund industry gets about 1.60 percent in expenses from you - the consumer - in order to pay for things like marketing, taxes, tools and the occasional piece of advice. You and your spouse will be paying your friendly fund manager $16,000 every year based on your million dollar portfolio. That's four times what you're paying in federal taxes! And for what? Certainly not for performance since two-thirds of all actively managed funds under-perform the benchmark indexes.
Now let's pretend you and your spouse have an investment advisor in addition to your mutual fund manger and he's convinced you to wrap up your retirement assets in a high-commission insurance product like a variable annuity. Remember that expense ratio of 1.60? Well, it could climb to as much as 2.50 percent or more!
Now you and your partner are paying an outlandish $25,000 a year to your fund manager and advisor to manage a portfolio that could be managed by you, with better results, for next to nothing. $25K is over HALF of what you've taken out to live on every year. I don't know about you, but retirement is supposed to be fun and engaging and I can have a lot more fun on $65,000 than I can on $40,000.
The saddest part is that's about $20,000 more than what you really have to pay. So why do brokers and financial advisors continue to harp on taxes and never on fees? It doesn't take a rocket scientist to figure that one out, does it? It's a canard - a smoke screen - and we fall for it!
Now look, I'm not pointing fingers at you. Many of you know that I went from rags to riches back to rags again in less than two years because I didn't know what was going on in my portfolio. Like many of you, I trusted my broker to handle my money partly because I believed he was more qualified than I was to do it. That assumption cost me a whole lot of money.
The fastest way to improve the returns in your portfolio without taking on one ounce of additional risk is to lower your fees. The best way to lower your fees is to ditch your money managers. You don't need them, and in spite of what you might think, you don't have to spend countless hours to do manage your own money.
Let me know if you agree or disagree. Do you think your money managers are worth what you pay them? Do you really know how much you pay them? Leave your thoughts and comments below.
Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.
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Kim Snider is an author, speaker and host of Financial Success Coaching, Saturdays at noon, on KRLD Newsradio 1080, Dallas - Fort Worth. This blog is primarily devoted to empowering individual investors with information to help them be good stewards of their money. Above all, it is about achieving true financial success. Kim's book, How To Be the Family CFO: Four Simple Steps to Put Your Financial House in Order is in bookstores now. Order yours from Amazon or other fine booksellers today.
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