Charles Ellis & Mark Cortazzo

August 10, 2012

The Myths About Investment Management Fees

How much do you pay in investment fees every year? What is the actual dollar amount you pay to your financial advisor, let alone the mutual funds you own and the firms that have custody of your investments? How much do they really take away from your portfolio and its performance over the years? According to a ground breaking article by legendary financial consultant and WEALTHTRACK guest Charles Ellis, “investment management fees are much higher than you think.”

As Ellis points out the little over 1% of assets paid by most individuals and little less than one-half of 1% paid by institutional investors are “seen as so low that they are almost inconsequential” It turns out they are anything but! As Ellis points out “investors already own those assets so investment management fees should really be based on what investors are getting in the returns that managers produce.” Considered that way, fees are much higher. Pension giant CalPERS, the California Public Employees Retirement System, earned just one percent on its $233 billion investment portfolio in the past fiscal year. If it were to pay the average half a percentage point charge on assets under management, the fee would equal 50% of their return for the entire year!

The financial toll investment fees take on portfolios over the years is stunning. Last year, financial advisor and WEALTHTRACK guest Mark Cortazzo introduced a flat fee portfolio product for individuals with smaller and less complex portfolios than his usual high net worth clients. He compared the ten year costs for two clients, each with a $500,000 portfolio- one paying the not unusual annual fee of 1.5% of assets; to another, a flat fee client paying his $199 a month charge. With all other things being equal, the flat fee portfolio saved more than $80,000 in fees over the ten year period.

This week we are going to examine investment fees and how you can reduce them with Charles Ellis and Mark Cortazzo. Financial Thought Leader Charley Ellis is a world renowned investment consultant to governments, institutions and the financial industry. He has authored or co-authored some 18 books including the investment classic, Winning the Losers Game, and more recently, with Princeton economist Burton Malkiel, The Elements of Investing. He is devoting a great deal of his time to helping individuals become better investors. Mark Cortazzo is founder and senior partner of MACRO Consulting Group, a 20 year old financial advisory firm catering to high net worth, and now Main Street, clients. Mark has been recognized as a top advisor by Barron’s, Worth, and Fortune magazines among others. I began the interview by asking Charley Ellis how much higher investment management fees are than we think.

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WEALTHTRACK Episode #907; This program was originally broadcast on August 10, 2012.

Listen to the audio only version here:
Charles Ellis and Mark Cortazzo #907

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[wptabs mode=”horizontal”] [wptabtitle]Guest Info[/wptabtitle] [wptabcontent] Charles Ellis
Founder, Greenwich Associates
Author, The Elements of Investing

Mark Cortazzo
Senior Partner, MACRO Consulting
Founder, Flat Fee Portfolios[/wptabcontent] [wptabtitle] Newsletter[/wptabtitle] [wptabcontent]Consuelo MackThis has not been a confidence building week. Stock markets experienced their fourth straight daily drop on Thursday, driven lower by several developments. What’s being described as an electronic trading bug at brokerage firm Knight Capital Group roiled trading in about 150 stocks on Wednesday. Knight, one of the country’s largest market makers in stocks, suffered an estimated $440 million loss from the trading errors and saw its stock plunge more than 60% today and 33% yesterday. The inexplicable and extremely volatile trading in multiple stocks is reminiscent of the “flash crash” of 2010 and follows the problems Facebook had in its recent public offering.  (Speaking of Facebook, its stock has fallen 47% since its initial public offering price of $38 on July 26th. Thursday’s closing price was $20.04.)

Then there is the economic outlook. The Federal Reserve is clearly concerned about growth. Although it did not introduce a new stimulus program, or QE3 as many on Wall Street had hoped it would in its policy setting committee meeting this week, Fed watchers felt that it sent a clear signal that it was ready to ease in the near term if the economy does not improve. We will get an important read on the economy’s health tomorrow morning when the Labor Department releases July’s employment report. Wall Street expects tepid job creation and unemployment to remain at around 8.2%.

Three years into an economic recovery, it sure doesn’t feel like one. We are even beginning to hear the dreaded “R” for recession word here in the U.S. A recent headline in the Financial Times read: “Blue-chips Raise Recession Fears.” The FT reported that “estimates of revenue growth for the largest U.S. companies are being scaled back sharply by Wall Street analysts, signaling a mounting risk that the world’s largest economy may enter recession later this year.”

It’s a development we have talked about with many WEALTHTRACK guests. Sales and earnings estimates are being scaled back by analysts and companies alike as the global outlook becomes murkier. Recession is already happening in Europe. The so called peripherals- Greece, Spain and Italy- are there. Even mighty Germany is feeling the pressure from its weaker neighbors. Germany’s central bank recently estimated its economy had grown “moderately” in the second quarter. According to The Wall Street Journal, that’s “shorthand for growth between zero and five tenths of a percent.” Not exactly reassuring for Europe’s largest economy, which its finance minister rightly describes as the “Eurozone’s anchor of stability.”

So if global economies and company sales and earnings are slowing, what does it mean for the markets? That is a source of heated debate and both sides are being reflected in the stock and bond markets. On the one hand, investors have been buying dividend paying blue chip stocks for their dividend income and their financial strength. The S&P Dividend Aristocrats Index, made up of 30 companies that have consistently raised dividends for at least 25 years, has traded around record highs recently. How well will their prices and dividends hold up in a global slowdown?

On the other hand, yields on U.S. Treasury bonds have extended their multi-decade decline over the last year, lifting the prices of the underlying bonds. Global investors continue to buy them for their perceived safety and very real liquidity. As PIMCO bond guru Bill Gross recently put it, in explaining why he is holding 35% Treasuries in his PIMCO Total Return Fund: “don’t underweight Uncle Sam in a debt crisis.”

This week’s WEALTHTRACK guest has been overweighting Uncle Sam in his portfolios for the ten plus years that I have been interviewing him. It’s been an extremely profitable strategy and he is sticking with it. He is Robert Kessler, Founder and CEO of Kessler Investment Advisors, a manager of sovereign debt portfolios for institutions and high net worth individuals with a concentration in U.S. Treasury debt. I’ll begin the interview by asking him about his long standing investments in Treasuries and what he is seeing that most on Wall Street are not?

As always, if you can’t join us at the appointed hour on your local public television station, you can watch the show on our website as a podcast or streaming video. You can also find the One Investment picks of our guests and my Action Points there.

For those of you who would like to see our program 48 hours in advance of the broadcast, you can subscribe to our WEALTHTRACK PREMIUM subscription service on the website.

Have a great weekend and make the week ahead a profitable and a productive one!

Best regards,


[/wptabcontent] [wptabtitle]Action Point[/wptabtitle] [wptabcontent]
  • Seek passive management
  • Look at ETFs and index funds

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[/wptabcontent] [wptabtitle]One Investment[/wptabtitle] [wptabcontent]ELLIS: MINIMIZE INVESTMENT FEES
– Seek passive management
– Look at ETFs and index funds

“Everybody, everybody who’s an individual investor should be actively seeking passive management. They can do it with ETFs. They can do it with index funds. And the best known, most widely capable index fund managers are the ones to go with.”
– Charles Ellis

– FDIC-insured money market funds
– Own tax inefficient investments in tax deferred accounts
– Own tax efficient investments in taxable accounts
– Know what you are paying in fees

“I’m going to go with controlling the things that you can control. And I’ll give you three quick examples. Things like money markets. The average money market is paying four-one-hundredths of a percent. You can shop that around and get FDIC-insured money markets paying over one percent right now. So that’s 25 times the yield. On your safe money, control the thing you can control. Making sure you’re looking at where you own, what you own. So tax-inefficient investments, make sure you own those in the tax-deferred accounts; tax-efficient investments, make sure you own them outside in your taxable accounts.

And the third and most important thing is making sure that you understand what you’re paying in fees, in dollars, as a percentage and relative to your portfolio size. And are you getting a good value for that? You know, it is something that people spend a few minutes to try to save a few percentage on their auto insurance. That’s hundreds of dollars. By taking the time to look at that and having it reviewed by someone, it could be tens-of-thousands of dollars, and maybe even a six-figure difference, even on a more moderate size portfolio over time, because it’s the effect of that compounding that’s being sliced off with those higher fees”
– Mark Cortazzo

[/wptabcontent] [wptabtitle]Transcript[/wptabtitle] [wptabcontent]WEALTHTRACK transcripts are now included in WEALTHTRACK Premium subscriptions. Sign in to access this weeks transcript.You can also purchase and download the transcript separately safely and securely with your credit card or PayPal account. You will need the free Adobe Acrobat Reader (Mac/Win) or Preview (Mac) to view and print the transcript.
WEALTHTRACK transcripts are available individually for $4.99. Click here to purchase a copy.
[/wptabcontent] [wptabtitle]Bookshelf[/wptabtitle] [wptabcontent]
[/wptabcontent] [wptabtitle]Purchase DVD[/wptabtitle] [wptabcontent]Please check back for availability.[/wptabcontent] [wptabtitle]Archive[/wptabtitle] [wptabcontent]#826 on 12/23/11:
Two blue chip financial advisors offering wealth building advice for blue collar budgets. Sheryl Garrett of the Garrett Planning Network and Mark Cortazzo of MACRO Consulting Group discuss affordable financial services for the rest of us.

#719- 11/5/10:
On this week’s Consuelo Mack WEALTHTRACK: the first of a two part series on “The New Retirement Reality.” Kiplinger’s retirement guru, Mary Beth Franklin and award winning financial planner, Mark Cortazzo bring us up-to-date on what to expect and how to plan for the new retirement climate.

#720- 11/12/10:
On this week’s Consuelo Mack WEALTHTRACK: the second of a two part series on “The New Retirement Reality.” Kiplinger’s retirement guru, Mary Beth Franklin and award winning financial planner, Mark Cortazzo bring us up-to-date on what to expect and how to plan for the new retirement climate.

[/wptabcontent] [/wptabs]


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