Rollover fees range from about 1% to 3% of AUM.
For many investors, a detour account proves to be less expensive over time than a brokerage account that charges commissions on trading activity. However, a buy-and-hold investor who rarely sells their holdings may be better off with a commission-based fee structure.
Understanding computation wrap
A rollover account has the advantage of protecting the investor from over-trading, which can happen if the broker buys and sells assets in the account excessively in order to generate more commission income. This is known as “jostling.”
In a detour account, a broker is charged a fee based on the total assets in the account, and thus is incentivized to obtain the highest possible return on the invested amount.
The main gaps
Rollover account is a flat fee for brokerage services based on total assets under management.
For active investors, a detour account may be less expensive than an account that charges a commission per trade.
In a spin account, the broker’s incentive is to maximize gains rather than generate trading fees.
Wrap Accounts Vs. Traditional accounts
The Single Investor account provides access to professional money managers who work primarily with high net worth institutions and individuals. Mutual fund companies also offer capping accounts with access to a wide range of mutual funds.
A minimum investment wrap account may require $ 25,000 to $ 50,000. A mutual fund account with wrapping fees usually has a much lower initial investment requirement.
Long-term investors who buy and own stocks may be better off with the traditional fee structure.
Fees pay for marketing and distribution costs as well as payments to middlemen who sell money and work with clients. These fees are an additional fee for the investor in a mutual fund wrap-up account.
A detour account works best for an investor who wants a degree of hands-on management and advice. Investors who use a buy and hold strategy for a stock portfolio may be better off paying the incidental trading fees that the account incurs.
For example, an income-oriented investor may hold a portfolio of stocks and bonds that pay dividends, and make little, if any, changes for years. If the investor sells the shares after this, then significant capital gains taxes may be due because the cost-per-share basis may be much lower than the current market price.
An investor may be better off holding a portfolio to earn dividend income. No capital gains tax is incurred, and there are no commissions or bypass fees to be paid.
In this case, moving assets to a detour account would have resulted in more costs and reduced the total return for the investor.
1. Equities Over Bonds
While equities do carry a higher risk than bonds, a manageable combination of the two in a portfolio can offer an attractive return with low volatility.
2. Small vs. Large Companies
The performance histories of U.S. companies (since 1926) and international companies (since 1970) show that small-capitalization companies have outperformed large-capitalization companies in both the U.S. and international markets.
3. Managing Your Expenses
How you invest your portfolio will have a direct impact on the cost of your investments and the bottom line investment return that goes into your pocket. The two primary methods to invest are through active management or passive management. Active management has significantly higher costs than passive. It is typical for the expense difference between active and passive management to be at least 1% per year.
4. Value vs. Growth Companies
Since index tracking has been available, value companies have outperformed growth companies in both the United States and international markets. Academic financial professionals that have studied both value and growth companies for decades have commonly referred to this as the “value effect.” A portfolio that tilts toward value companies above growth companies has historically provided higher investment returns.
Asset allocation and diversification is the process of adding multiple asset classes that are different in nature (U.S. small stocks, international stocks, REITs, commodities, global bonds) to a portfolio with an appropriate percentage allocation to each class. Since asset classes have different correlations with one another, an efficient mix can dramatically reduce the overall portfolio risk and improve the expected return. Commodities (such as wheat, oil, silver) are known to have a low correlation to stocks; thus, they can complement a portfolio by reducing the overall portfolio risk and improving expected returns
Over time, a portfolio will drift away from its original asset class percentages and should be put back in line with the targets. A 50/50 stock-to-bond mix could easily become a 60/40 stock to bond mix after a prosperous stock market rally. The act of adjusting the portfolio back to its original allocation is called rebalancing.
The Bottom Line
Despite how complicated portfolio investing has become over the last several decades, some simple tools have proved over time to improve investment results. Implementing tools such as the value and size effect along with superior asset allocation could add an expected return premium of up to 3 to 5% per year to an investor’s annual return. Investors should also keep a close eye on portfolio expenses, as reducing these costs adds more to their return instead of fattening the wallets of investment managers on Wall Street.