How much should it cost to manage your own money? A lot depends on what you know or don’t know about investing.
If you are comfortable buying and selling investments online, then that’s half the battle. Brokers these days charge a commission for an activity that frankly isn’t any more difficult than sending an email.
If your broker makes recommendations aside from entering and executing your trades, you might consider that a service worth paying for. But first consider who else is paying your broker. He or she might be earning a separate payment from the mutual fund you just bought at their behest.
So let’s assume you don’t need or want trade advice and that you can enter and complete your own transactions online. What’s left that’s worth paying for at all?
Well, there’s financial planning. A fee-only advisor will charge you by the hour for budget help and goal-setting. Price can vary, but a good advisor will lay out an estimate well in advance and help you decide which parts you should get professional help on and which you might be able to do on your own.
Tax planning and IRA advice is another area where a solid professional can be worth his or her weight in gold. Mistakes can be costly and might not be obvious until months or years later.
Then there’s portfolio building. A target-date retirement fund will set up a simplified portfolio for you. It really is set-it-and-forget-it planning.
Target-date funds vary in cost, from very cheap to surprisingly expensive. As usual, what matters is often the cost of the underlying investments. A target fund that owns mostly index funds will be cheaper to own. A target-date fund that holds active funds can be costly.
Likewise, you can use exchange-traded funds to own a portfolio which allows you to mimic the efficiency of a target-date fund at a low cost. You will have to do the rebalancing yourself, but the upside is that you can build up a far more sophisticated collection of investments at a tiny fraction of the cost of a pro money manager.
So what’s the right price? If you expect to own an all-in-one fund full of actively managed money, you are likely in the ballpark of 1% to 2% of you assets per year. It’s not as costly as a 401(k), but not cheap.
A target-date fund that holds index funds will be much cheaper but can run up to 1% and often fall around 0.35%. The cheapest target-date funds are under 0.2% of your money per year.
Owning the ETFs is comparable to the cheapest target date funds but offer you the hands-on control many do-it-yourself investors seek. Most ETFs trade commission-free, too.