Widow, 69, Pays $27,000 A Year To Manage Her $1.8M Portfolio. Her Son Says She’s Paying Too Much

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A 69-year-old widow has kept her $1.8 million portfolio with the same advisor for 20 years. Her son recently looked at her statements and found she’s paying a 1.5% annual wrap fee, or about $27,000 a year, on an account she rarely trades.

When he raised the issue, the advisor told her the son was meddling. She trusts her advisor, but she also trusts her son, and she’s now stuck in the middle.

The fee isn’t necessarily excessive on its own. But she has every reason to understand exactly what she’s paying for and whether the arrangement still fits her needs.

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What A Wrap Fee Covers — And What It May Not

A wrap fee generally bundles investment advisory services and certain brokerage and transaction costs into one fee based on the value of the account.

The SEC’s investor bulletin on wrap fee programs explains that wrap programs can cover portfolio management, brokerage services and other services for a single fee.

But not every investment expense necessarily disappears. Mutual fund and ETF expense ratios, for example, are generally separate from the advisory fee.

If her $1.8 million portfolio carries a 1.5% wrap fee, that alone costs about $27,000 a year. If the investments inside the account have an average expense ratio of 0.6%, her combined investment and advisory expenses could approach 2.1%, or roughly $37,800 a year.

The exact total depends on what’s actually held in the account and what the wrap fee includes.

Is A Wrap Account Still Worth It If She Rarely Trades?

Low trading activity doesn’t automatically make a wrap account inappropriate.

The SEC recommends investors consider whether the services provided through a wrap program justify the fee and whether they expect to trade frequently or follow a buy-and-hold strategy.

For someone who rarely trades, it may be worth comparing the wrap arrangement with other advisory structures. But the value of an advisor can also include financial planning, portfolio management, tax coordination and other services that aren’t reflected in the number of trades.

The better question isn’t simply how often she trades. It’s what she’s receiving for the $27,000 annual fee.

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Her RMD Deadline Is Getting Closer

At 69, she’s approaching another important retirement-planning milestone.

The IRS says RMDs generally begin at age 73 for people subject to the current age-73 rule. That gives her several years to evaluate how much she has in traditional retirement accounts and whether her future withdrawals could push her into higher tax brackets.

The years before RMDs begin can also provide an opportunity to evaluate partial Roth conversions. Under IRS Publication 590-A, amounts converted from a traditional IRA to a Roth IRA are generally included in taxable income for the year of conversion.

That doesn’t mean she should automatically convert money. But a long-term tax projection could show whether partial conversions make sense before RMDs begin.

If she eventually misses an RMD, the IRS generally imposes a 25% excise tax on the amount that should have been withdrawn. That rate can potentially fall to 10% if the shortfall is corrected within the applicable correction window, and the IRS may waive the tax in cases involving reasonable error.

How She Can Check The Numbers Herself

She doesn’t have to take either her son or her advisor’s word for it.

The SEC requires registered investment advisers to provide a Form CRS relationship summary explaining their services, fees, costs, conflicts and standard of conduct.

She can also look up her advisor and firm through the SEC’s Investment Adviser Public Disclosure database.

With those documents in hand, she can ask for a written breakdown of everything she paid last year, including the advisory fee, fund expenses and any other account-level charges.

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Bringing Her Son Into The Conversation

Her son’s involvement doesn’t have to become a family fight.

She can invite him to a review meeting if she wants his help and let the advisor answer the questions directly. She can also make clear that the final decision is hers.

Under the SEC’s interpretation, an investment adviser subject to the Investment Advisers Act fiduciary standard has a duty to act in the client’s best interest.

That doesn’t mean a 1.5% fee is automatically inappropriate. It does mean she should be able to understand what she’s paying and what services she receives in return.

Getting An Outside Opinion Without Leaving Her Advisor

The easiest way to settle the debate may be to compare the current arrangement with alternatives.

AdviserMatch lets investors compare financial advisers for free, giving her a way to see what other professionals charge and what services they provide.

She doesn’t have to fire her longtime advisor to get a second opinion.

If the 1.5% fee is justified by comprehensive investment management and planning, she can stay with confidence. If another arrangement could provide comparable services at a meaningfully lower cost, she can make that change based on numbers rather than family pressure.

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This article Widow, 69, Pays $27,000 A Year To Manage Her $1.8M Portfolio. Her Son Says She’s Paying Too Much originally appeared on Benzinga.com

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