Whelan Financial Planning - Thursday, October 01, 2015

I had an interesting experience today.

I met with a client and as part of his Retirement Plan Service, we discussed an investment account he had with one of the major brokerage firms.

Like many of us, this client is very busy.  He doesn't really stay on top of his investments. The client's impression of his broker was good, largely because he remembered that the value of his account didn't decline during the stock market crash of 2008.  I must admit that I was impressed by that achievement too.

The management fees on the account in question were currently 2% of the amount invested.  A high fee by most standards, but I think fees should be evaluated in terms of the services and value a client receives.  If the broker in question had protected the value of the account during a major market downturn, he could be worth 2% per year.

The client gave me very rough information on the history of this account.  He was pretty sure he opened it in 1988 with $38,000. 

After the client left my office, I did a quick analysis.  What would the client's account be worth if he simply invested $38,000 in a 60% Stock / 40% Bond balanced mutual fund on January 1, 1988?  It's an IRA account, so income taxes didn't have to be taken into consideration.  I also assumed that dividends and capital gains distributions were reinvested.

The value of the account as of 9/30/2015 would have been close to $475,000.  This is about 4 times higher than the current value of the account in question.  More importantly, when I included the cost of a 2% management fee, the account value ended up at $275,000.  Over 27 years, the management fee reduced the account value by $200,000.  Still - at $275,000, the balanced mutual fund would have left my client with more than twice the amount of money he has today.

Admittedly I have made a lot of assumptions in this analysis.  It is by no means scientific.

I'm a big fan of balanced or target date mutual funds for busy people who don't have the time or interest in monitoring their investments.  Spend a little time upfront to be sure that you understand the potential risks associated with the fund's investment mix between stocks and bonds. Don't just assume that because a target date matches your retirement date that the fund is the right one for you.

Finally - I know investment costs matter - but when I saw some actual numbers today - all I could say was WOW!