Q&A: Professional investment management fees

Dear Liz: I have an IRA with over $100,000 at a discount brokerage. I had it in a target date fund. Due to market downturns, I got nervous and was convinced to put my investment into the brokerage’s portfolio advisory services with additional fees coming to $1,600 per year. In general, is it wise to change investments to these more professional services?

Answer: If professional management keeps you from bailing out of your investments when markets decline, then paying a higher fee may be justified. But the higher the fees you pay, the less money you can accumulate. For example, your IRA could grow to more than $600,000 over 30 years if you net a 6% return. If your fees are one percentage point higher, and you net just 5%, you’d end up with less than $450,000.

Some discount brokers, including Schwab, Fidelity and Vanguard, now offer a low-cost “robo” option that invests your money using computer algorithms. These robo options don’t offer the highly customized investment portfolios that some other services provide, but they come at a much lower cost — typically 0.3% to 0.4%. A few, including Vanguard and Betterment, offer access to financial advisors.

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  1. I just read an answer of yours that referred to “robo” advisors at Schwab, Fidelity, etc. as low-cost alternatives for investing. I have looked into the Schwab robo advisors and no matter how much I change my answers to their questions I never can come up with a portfolio that has less that 10% in cash. Parking that much of the account into cash is, to me, a big fee and has kept me from using Schwab’s robo accounts. Am I being a bit paranoid about the large cash holding or is Scwhab hiding a big fee? BTW…I have a lot of accounts at Schwab, with a few stocks and several low-cost mutual funds and using a robo account would be in addition to those standard accounts which is why I don’t want a big cash holding. I keep cash in other accounts.