arrowBack print

Investment Fees What's The True Impact On Your Taxes And Portfolio Value? (Online-Only Article)

By: Brett Miller, CPA, CFP ®*

During a recent seminar, we conducted a quick poll of attendees to determine what fees doctors were paying their investment advisors.   To our disappointment, less than one-third of the doctors in attendance even knew how much in fees they were actually paying.

Doctors are always looking for ways to boost investment performance and increase the value of their portfolios.  Fortunately, they need not look far!   Excessive investment fees can have a huge impact on the long-term growth potential of a portfolio, yet most doctors remain in the dark.  

According to Morningstar, the average annual investment management fee is 1.0% of assets under management.  Paying an extra 0.5% per year in fees may seem immaterial at first, but this results in an extra $162,000 in fees paid over a 25-year period (assuming a starting value of $250,000, annual savings of $50,000, and a 6% annual rate of return).  Compounding the pain, the reduction of investment principal due to higher fees will decrease the ending portfolio value by over $300,000!

The effects of higher investment fees are even worse when doctors choose to invest in an annuity or other insurance-based contract.  The thought of guaranteed retirement income is tempting until doctors realize the true costs involved.  Unfortunately, the insurance industry does an excellent job of “hiding” the various fees by scattering them throughout their lengthy prospectus.  Thankfully, Morningstar has properly analyzed these fees and reports that the industry average expense ratio for annuities is 2.28% per year, before fees for optional riders.  The most common rider is the guaranteed income rider, which carries an additional cost averaging 1%.  Combined, the average annuity is charging a whopping 3.28% in fees per year!  Using the prior assumptions, a doctor purchasing such an annuity can expect to pay an extra $600,000 in fees versus the standard investment management fee.  Worse yet, over the long term, these excess fees reduce the ending portfolio balance by over $1.1 million dollars.

So how can doctors avoid these costly mistakes and generate the best rate of return net of fees?  We recommend doctors first focus on understanding their actual fees paid.  Doctors need to ask their current advisors for a breakdown of total fees paid in writing. Further, we recommend doctors avoid costly commission and insurance-based products and instead use fee-only investment advisors whose fees are no higher than the industry average of 1% of asset under management on an annual basis.

By selecting a fee-only advisor, doctors will also have the ability to pay their investment fees outside of the portfolio assets.  For company sponsored retirement plan accounts, doctors can have the practice pay the investment management fees and deduct it on the practice tax return.  Additionally, paying investment fees outside of plan preserves the underlying investment value of the portfolio.  Instead of eroding portfolio assets to pay investment fees, all assets can instead remain invested for future growth.   Paying a 1.0% fee outside of the retirement plan (through the practice) will increase the ending portfolio value by over $700,000 and generate a tax deduction of close to $175,000!

Doctors need to understand the true long term impact of excessive investment fees on their taxes and portfolio values.  We encourage doctors to seek advisors and investments structures that offer average or below average fees and that maximize tax-deductibility, to substantially increase the long term value of their investment portfolio. 


* Brett Miller is a wealth manager at McGill Advisors, Inc. (formerly known as Select Consulting, Inc.), a firm that specializes in providing value-added investment management services to dental professionals on a fee only basis. For more information call 866.727.6100.

arrowBack

The McGill Advisory is designed to provide accurate and authoritative information with regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal or accounting advice or other expert assistance is required, the services of a competent professional should be sought.

Copyright 2017 John K. McGill & Company, Inc. All Rights Reserved.