How I Helped My Brother Take Control Of His Finances Through ETF’s

By: Pete
Date posted: 03.04.2013 (2:29 am) | Write a Comment  (0 Comments)

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Many of you might relate to this story. My brother Frank was in his late twenties with a decent job and nearly 60K saved away in savings. Because he’s uninterested by financial markets, he had never really taken the time to even consider doing anything else than what he had been recommended by his financial planner. After all, that person knows this stuff so much more than Frank so he had assumed that his portfolio was as good as it could be. I guess in some ways it was.

Only The Rich Get Top Financial Advice

The fact is that most planners have some kind of vested interest. They might not charge you an upfront fee but they do need to get paid so they end up selling investments such as mutual funds that kick back to them (or their employer) a portion of the fees. It’s logical because the alternative is usually for brokers/planners to charge a % of assets, usually 1%. The problem is that for someone who owns $50,000, that amounts to $500. Not that it’s bad but if you account for time spent, employees, and all other costs, it makes no sense to offer the service for that little. So instead they go for funds that can send back a % of assets which:

-over time generate money
-are very easy to manage

In my brother’s case, he had a fairly simple portfolio. He owned one mutual fund that owned several others giving him a very balanced portfolio at a 1.50% annual fee. It’s not terrible; especially when you consider that many other funds charge twice that amount or more. The fund had solid historical returns and was aggressive enough to match Frank’s investor profile. It made a ton of sense.

Then I Started Investigating…

Obviously, one of the benefits of trading mutual funds is that there are usually no “execution fees” so you can go in and out of funds and invest every month without incurring any costs.

An ETF portfolio on the other hand generates commissions every time a trade is done.. that fee is fixed (between $5 and $20 per trade depending on your broker).. There is also a very limited fee of 0.20% at most (for an average fund)

So you can either pay more annual fees or more commission? Which is better? Depends on how much money you have.

A few brokers have even started offering free ETF trading making the comparison even easier. But for today’s comparison, let’s say that my brother was paying $7.95 per trade.

Can Fees Matter That Much?

I’ve written about this but yes, they do. Let’s compare the returns of both portfolios over 40-50 years… with the following assumptions:

-Returns before fees are identical (6.5%/year)
-The mutual fund portfolio has 1.50% of fees which becomes 1% once he reaches 100K in assets
-The ETF portfolio has fees of $96/year (1 trade per month) except for that first year where more trading is necessary to get it started $200.
-My brother reinvests $15,000 per year (for simplicity’s sake, it’s done at the end of the year)

So basically, from the very first year, my brother is ahead and the difference grows larger every year as the fees difference becomes more significant. In the end, it makes a difference of over $1M…!! Why is it so big? Not only is there a huge difference between $100 of trading fees and a 1% charge but that difference is reinvested for 10-20 years or longer. It’s a HUGE difference in the end.

What I Did Next

I arranged a meeting with my brother, showed him the numbers and explained the concept. It’s difficult to argue with that much of a difference. Especially since there are other benefits involved (knowing and understanding what you’re investing in is the main one).

His Biggest question as you can imagine was.. how much time would this take me? I answered.. the initial setup will take a few hours and then about 10 minutes per month. Think I’m exaggerating? Not at all! Here was the todo list:

-agree on the portfolio profile (the ETF’s used, weights, etc)
-open a brokerage account
-sell mutual fund positions
-transfer the money to the new brokerage account
-setup an automatic transfer to be done at least monthly
-setup a spreadsheet that would give him trades to execute (see this example)
-every month, take a look at any trading that needs to be done
-on a yearly basis, review target weights for each ETF

It ended up taking a while but he did make the change about 6 months ago and has overperformed the fund he owned by almost 1% (basically the fees over a half year).

Based on all of this, I’m trying to see why or how someone could not want to go down this route.. am I missing something? What are you waiting for if you have not tried already?


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