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Question for the Money Doctors

Question submitted on May 11, 2011.

Question

I have 2 acct. with a DFA financial planner/advisor(IRA and Indiv.accts.) that are doing well now, good gains. I pay him .80% quarterly to manage them but all the funds he has me in I also pay an expense ratio from .30% up to .96%. This I do not like but there''s no way around it unless I change fin. planners/advisors. I realize that these "gains" (around $100,000) are only on paper right now but he makes his money off these "paper" gains as well as the fund managers. I would like to turn this $ into actual financial gains for me. I would like to know if it would be a good idea to cash out about 1/3 to 1/2 of the gains (& pay the taxes at the time of withdrawal) and get it in my possession (to be reinvested or just put into a savings) to realize the gains he has made me. Thank you, lnwhetten

Answer

I believe you mean you are paying 0.80% annually, as opposed to quarterly which would be 3.2% as an advisory fee.  Going with my assumption you are paying 0.20% quarterly.  In my opinion, 0.80% is actually very reasonable for a DFA approach, assuming your advisor is servicing you well.  Depending on the size of your account and asset allocation, your total expenses are more than reasonable to many other investment alternatives, inclusive of various alternatives of managing your own funds.  Keep in mind a management fee in theory aligns the your goals with that of the advisor.  If the advisor is successful and your accounts perform well, then the advisor earns more because the investment advice and management has benefitted you.  If your account does not do well, the advisor earns less. You should also discuss your tax concern with your advisor to determine if there is a tax efficient way to rebalance your portfolio to minimize the capital gains while still keeping you risk profile in tact.  This advice and service should be part of the advisory fees you are paying and add value to you.

If your personality is such that you simply dislike paying fees, then you will have to make a determination as to whether it is worth it to you to pay taxes on $100k in gains in order to avoid what you perceive to be "he makes money of these 'paper gains'."  I would guess growing your account is one of your objectives and if so, it sounds like you are pleased with the gains.  However, if you do not want to pay fees, you would have to revisit your objectives for the account in order to make a determination if reinvesting or putting proceeds into a cash savings account makes sense for you.  Not knowing your tax situation or account size I cannot quantify that for you, however, your advisor should be able to.  I would also caution you regarding cash "not having any fees", because we are in an extremely low interest rate environment at this time with a bit of official inflation per the CPI.  Any interest earned would be taxable at your ordinary income tax rate, so your return in the current environment on cash, net of taxes and inflation would most likely be negative.  Obviously a negative real return could be considered a fee in itself.


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