For clients who elect its “Managed Investment Portfolio,” E*TRADE charges a maximum annual net advisory fee of 0.90 percent on assets up to an account value of $100,000. Its fees decline on a sliding scale as assets increase in value. For assets over $1 million, its fee is 0.65 percent.Most of the funds recommended by the E*TRADE representative were actively managed funds where the fund manager attempts to beat a designated benchmark. The average expense ratio of those funds was 0.72 percent. A comparable passively managed portfolio would have lower expense ratios, ranging from 0.20 percent to 0.47 percent. Higher expense ratios reduce returns.
The funds in the E*TRADE portfolio paid 12b-1 fees of 0.15 percent. These are marketing fees often paid to intermediaries for selling the fund. These fees are included in the expense ratios of the funds. The payment of 12b-1 fees gives brokers an incentive to sell those funds and may create a conflict of interest. Passively managed funds typically pay no 12b-1 fees.
Three of the mutual funds recommended by E*TRADE charged front-end loads, which is a commission or sales charge applied at the time of the initial purchase. These loads lower the size of the investment. Passively managed funds typically do not charge front-end loads.
What are the chances that an actively managed portfolio will outperform a less expensive, passively managed one? Exceedingly small. My colleague Larry Swedroe wrote a blog post addressing this issue. He found that, based on the assumptions set forth in his blog, the probability of a portfolio of 10 equally-weighted actively managed funds, rebalanced annually, successfully generating “alpha,” was a minuscule 0.055 percent over a 10-year period.
Most importantly the E Trade account will provide a facilitator not an adviser. If you hire an investor coach you will have someone to guide you through the tough times.
Please comment or call to discuss how this affects you and your family’s financial future.